Congratulations! You’ve started your small business and are past the hurdles that come with selecting a name, registering with the Department of State, drafting Shareholder Agreements, and all of the initial confusing parts. Now you’re starting to grow and realize you need someone to help you. Should you hire an employee or an independent contractor?
In order to protect yourself from potential issues with the IRS and/or from legal liability, it is imperative that you outline the nature of the relationship you will have with the person you hire, and designate them accordingly.
- Is there a written contract?
First things first: document the terms of your engagement of either the employee or the contractor. It will protect you and the worker should issues arise in the future. Do not limit the work description to state that the worker is either an employee or a 1099 contractor. The IRS won’t care about what label is designated on the contract. They will look at specific details of the relationship.
- How much control do you have over the performed work?
If you only care about the end product and are not telling the hired worker how to get the work done, it will be likely that the person can be a 1099 independent contractor. Take, for example, the hiring of a website designer when you have no idea how to code; all you care about is having a great looking, functional website for the agreed upon fee. This website designer is a 1099 contractor. Contrast that with hiring a person who is performing a core service your company offers customers after being trained by you and provided a company logo shirt and business card. Yes, this person is properly classified as an employee, whether he or she works 5 hours a week or 50 hours a week.
- How much control do you have over their finances?
Is the person you hired bringing their own tools and equipment or are you providing everything for them? Are you going to reimburse them for their expenses? Are you guaranteeing them a specific amount of wages regardless of how often they produce work product or provide services? Are they free to seek business opportunities from other clients? The more authority you have over their finances, the more likely it will be that they will be considered to be your employees.
Misclassifying workers is such a common mistake employers make, there are attorneys who make a living taking exclusively these types of cases. So now that things are going so well with your business that you get to pay someone else to assist you, make sure you’re well informed. Not doing so can come at a very high price, whether in fines or litigation.
This Blog was written by Hunter Business Law Attorney Sheryl Hunter. Profile
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