January 28, 2015
Authored by: Caitlin Hartsell
One of the earliest decisions a start-up will make is whether it will engage independent contractors or hire employees. Some new businesses prefer to utilize independent contractors to do specific tasks, like accounting functions, because contractors can provide hiring flexibility and cost savings. A business can lower its expenses on things like payroll taxes and employee benefits if it engages an independent contractor instead of an employee for certain projects.
However, it is not enough to merely call a worker a “contractor” instead of an employee. Further, it can be costly if an employer misclassifies an employee as an independent contractor. For instance, the business could be liable for withholding taxes for the worker for the time he or she was employed.
The IRS and the states utilize different tests to determine whether an individual is an employee or independent contractor. Some states examine the previous IRS 20 factor test