Independent Contractors vs. Employees

 Many businesses hire independent contractors to fulfill work they need done rather than hire someone as an employee.  Plus, they may need the workers for a short-term basis, depending on the industry. Businesses may also use independent contractors to obtain a specific skills for which they do not currently have from their staff.  

Whatever the purpose for the use of independent contractors, independent contractors provide businesses with the opportunity to obtain flexible labor and expertise when they need it.

Despite the positive aspects of independent contractor labor, the IRS has some specific guidelines businesses must be aware of when hiring such individuals. Misclassifying someone as independent can become costly for an employer.  Information from the IRS can be obtained here.

In general, the key indicator as to whether someone is an employee vs. an independent is the amount of control the employer places over an individual to perform the work.  There are other factors to consider, but control of the end result is extremely important to assess so as not to misclassify the relationship.

The two forms of control the IRS will look at to determine the nature of the business relationship are:

• Financial Control
• Behavioral Control

Financial control can be described in simple terms as does the individual contractor have a financial interest in the endeavor, that is, do they have anything invested in the process besides their time (equipment, etc) and would they recognize a profit or loss from the activity.  

Behavioral control would include a business dictating how something is to be done, when someone needs to come in to work, and  where the work is to be performed.

Proper evaluation of an employee/independent contractor situation before making the decision to bring someone on board is vitally important. Assessing whether someone is an employee or independent contractor can be difficult to determine.  LFC can help with these assessments.  Contact LFC to discuss work classifications for your business.