For small business owners, choosing between hiring employees or contractors is an important decision that defines not just working relationships, but taxation as well. While it’s wise to base your hiring decision on the type of working relationship you desire, you should also be aware of your tax responsibilities in either case.

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At the outset, it’s important to understand the difference between an employee and independent contractor. The difference is determined by the amount of control an employer exercises. While both employees and independent contractors perform services at the behest of the employer, only with employees can the employer dictate how the service be performed. Independent contractors perform services in a manner they see fit. Independent Contractors generally charge higher fees for specialized services, use their own materials, and regulate their own work plan.


You should be aware of tax treatment differences between employees and independent contractors:


For employees:
 

  • You must withhold state and federal income tax

  • You must withhold Social Security tax

  • You must withhold Medicare tax

  • You must pay Unemployment tax on wages

  • You must complete a W-2 form for each employee


For independent contractors:
 

  • Employers do not have to worry about the above tax issues for employees. Independent Contractors handle taxes related to social security, medicare etc.

  • Employers have to produce a W-9 to be completed by the independent contractor.

  • You may have to file information returns (form 1099-MISC) to report certain types of payments made to independent contractors. Generally, any payment in excess of $600 will require a 1099-MISC form.


If you misclassify employees as independent contractors on your tax return, you’ll be liable for paying employment taxes for that worker, so double check all Employment Agreements and Independent Contractor Agreements to be sure of your working relationship.


For more information about business taxes, go to www.irs.gov.

Get started Start Your Independent Contractor Agreement Answer a few questions. We'll take care of the rest.

Get started Start Your Independent Contractor Agreement Answer a few questions. We'll take care of the rest.