Independent Contractor vs. Employee: Which One is Right for Your Online Business?

So you’re ready to hire help, are ya? Well congratulations, my friend!! You’ve just taken a big step towards growing your business. But with new outsourced help comes new things to know about taxes.

And while most people know what a contractor is and what an employee is, do YOU know what the IRS thinks about? As in…do you know how either will affect all those forms to submit come January? 

And if you fudge it up on accident, is it really that big of a deal? Well… kind of. There are consequences to paying employees as contractors, believe it or not. The IRS will penalize you and make you pay the payroll taxes you missed. 

So unless you want to owe Uncle Sam some money, it’s imperative to know what qualifies an independent contractor vs. an employee. 

And if you don’t… not to worry. You know I’ve got ya covered! In this post, I’m going to show you the differences, and how to know which is right for your business. 

(I promise — none of this is as scary as it sounds. As long as you know up from down, and pay your taxes accordingly, you should be golden!)

Independent contractors vs. employees

When we talk about outsourcing help in the online business world, we all tend to use these terms pretty interchangeably. Someone says “oh this person works for me.” And they could either mean a legit employee or someone they’ve contracted for help. 

And while most people know that: 

1. An independent contractor is someone who sets the rate paid and terms of the working relationship.
2. An employee is someone who does not set the rate paid and terms of the working relationship.

There’s actually a little bit more you need to know about which is which. Because it 100% does affect your taxes. 

Overall, it comes down to control.

Control over rates

Rates mean how much you’re getting paid. When someone asks, “What are your rates?” that’s really just business speak for, “How much do I need to pay you?”

When we’re looking at rates for independent contractors vs. rates for employees, the main thing to know is that a contractor tells YOU how much they want to be paid. But an employer tells the employee what the rate is. (Think: putting out a job listing with “here’s what you’ll be making per hour” language in it!)

When determining whether or not someone would be considered an employee, the IRS also looks at things like:

• If they’re reimbursed for things like travel and meal expenses for a retreat, technology, etc. 
• If they’re given benefits like health insurance or parental leave

If either of those things apply, automatic employee status, my friend!

Control over processes

Independent contractors typically have their own processes, too. Whether that’s a web designer, a launch copywriter, or business coach, they usually set the pace for how projects and the working relationship will go. 

They tell you how many rounds of revisions there are, when due dates need to be set, and when and where payments are made. 

But if you’re giving your new hire a business guideline or handbook to follow, chances are, they’re an employee. Because YOU’RE guiding the way for them. 

And usually, independent contractors will work with you on a more temporary or project basis. An indefinite working relationship typically implies employment, but not always. You can totally still have an independent contractor working for you on an ongoing basis (with something like an annual contract that gets renewed each year).

That’s where monthly retainers come in — like when you’re working with a bookkeeper to do your monthly books (oh hey, that’s us!). 

So it’s not exactly about the length of the working relationship, but more so the terms of it. 

Control of tax benefits (kind of)

As an employer, you’re required to withhold employee taxes and then send them to the IRS. However, independent contractors are in charge of paying their own taxes by sending in their quarterly estimated tax payments. 

For contractors, you send them a 1099 every January, and when they file their taxes, the IRS will use this document to cross check and verify everything is correct. 

But if you have an employee, you’ll send them a W-2 in January so they can file their own tax return come April… and that’s it. You’ve been sending smaller payments on their behalf throughout the year in the form of tax withholdings (a la Rachel Green – “Who’s FICA? Why is he getting all my money?”)

Not sure which is which?

Sometimes the line between an independent contractor and an employee is pretty clear. But… sometimes it’s not. And I know you don’t want to get penalized for not claiming your newfound business support correctly on your taxes!

So thankfully, the IRS does have a tool, called the SS-8, that can help you figure this out. You just fill in all the information about your employee/contractor, send it in, and they’ll let you know which one they really are. 

And if the idea of paying an employee sounds overwhelming because it will 100% change the way you do taxes, not to worry. Like I said, you know I got you! Me and my team would love to help. We’ll make sure your books look good so when tax season rolls around, you’re ready to rock and roll!