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chapter 2

EMPLOYEES VS. CONTRACTORS

One of the first things you’ll want to decide is if you need a full-time employee or an independent contractor. Part of this decision is up to you, while part of it is simply governed by law.

According to the IRS, "in general, someone who performs services for you is your employee if you can control what will be done and how it will done" while a contractor controls what will be done and how it will be done on their own accord. Also, contractors usually have their owns tools, be it a table saw or a laptop.

Misclassifying employees can get you in trouble by the IRS or another government agency so it’s important to know the difference. You could end up owing back payroll taxes, interest, and penalties if you make a mistake.

Take a good look at this chart. It outlines the basic differences between full-time employees and independent contractors.
EmployeesContractors
Employed by company Self-employed business
Must abide by company’s scheduleSet their own schedule
Use the company’s equipment and get business expenses reimbursedUse own their equipment and take care of business expenses
Generally lower wagesGenerally higher wages (though that’s often because of expenses and benefits)
Federal benefits, such as unemployment benefits, worker’s compensation, and social securityNo federal benefits
Company benefits, such as sick leave, vacation, health insurance, and various incentivesNot entitled to company benefits
Tax withholding, such as state and federal income tax, social security tax, medicare tax, and unemployment tax on wagesTypically no tax withholding, pays own tax
Employers file an IRS W-2 form (Wage and Tax Statement)Employers file an IRS 1099-MISC form (Miscellaneous Income)
Company files IRS I-9 form (Employment Eligibility Verification) Individually file IRS I-9 form (Employment Eligibility Verification)

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