Everybody’s Business: Difference between employees, contractors can mean hundreds of dollars

What is the difference between an independent contractor and an employee? This is one question that does not get asked often, but should. The choice can mean a difference of hundreds of dollars to the business owner. And the answer is … it depends.

According to the Internal Revenue Service, there are three categories that must be analyzed before this question is answered. However, after the analysis is completed a clear choice may not be prevalent. The type of relationship of the parties, behavioral control, and financial control are the considerations.

The first relationship consists of evidence of a written contract, the intent of the length of the relationship, does the work contribute to the main function of the business, and finally does the contractor participate in life insurance, vacation, sick leave or other employee type benefits.

The behavioral control deals with whether or not the employer directs and controls the tasks performed by the employee.

The final category deals with how continuous costs are paid: The investment made by the contractor, if payment is labeled as wages or commission, profit or loss is realized, and the extent of how services are rendered outside of the business.

Late last month IRS introduced a new program that removes the penalties and interest imposed on businesses for inaccurate classification of independent contractors. In order to qualify the business must have filed Forms 1099, treated the workers in the past as non-employees, and not be under any IRS or state agency concerning worker classification. Employers will pay an amount equal to one percent of the total wages and will be exempt from audits on those specific employees only.

Unfortunately, the choice to hire employees vs. soliciting service from an independent contractor will increase expenses, which can reduce the bottom line if adequate planning is not undertaken. Planning for increase cost is essential to maintaining positive cash flow and is necessary for business survival.

Sandra Taylor-Sawyer is director of the Small Business Development Center at Clovis Community College. Call the center at 769-4136 or visit www.nmsbdc.org/clovis