Independent Contractor VS Employee

photo of man painting drywall from above

As any small business owner knows, there comes a time when one can no longer do it all alone.  For some of us that means hiring employees and for others it means outsourcing to independent contractors.  I find a lot of owners are confused about the differences between these two and the different requirements for each.  I’ve heard that the state of California has been cracking down on small businesses who misclassify employees as independent contractors (IC’s).  This is a concern because, if you misclassify and the state finds out, they can not only require you to move IC’s to employees, but they can also fine you back taxes owed with penalties.

So, what is the difference? Unfortunately, there are several different agencies (state and federal) that have oversight so the distinction is not always clear.  Let me give you some guidelines to follow as the determination is up to you, the person hiring the person tasked with doing the work.

The simplest way to assess the situation is does the person operate their own business?  In other words, do they do what they do for multiple clients or do they only work for you?  Generally speaking, if they have several clients for whom they do the same work they would be considered an IC.  In which case, they should be caring their own liability insurance, have a business license and any special trade licenses needed to perform the work they do.

Frequently I see small business owners hire part-time people thinking they are IC’s. Just because someone is part-time, does not mean they are in IC.  If you dictate when, where and how their work is performed, they are most likely an employee per the state.  For example, if you hire us to handle your bookkeeping but tell us we must be at your location on Monday’s from 1-4 and that we must use your computer to perform the work, then we would be employees, not IC’s.  However, if you hire us to do your bookkeeping and we work on your account from our location during hours of our choosing, then we are IC’s.

This is a black and white case and I know they are not all this clear.  What you need to remember is, if the worker meets even ONE requirement to be an IC, then they are an IC.

If someone is an employee, you are responsible for providing worker’s compensation insurance and paying payroll taxes to the IRS and EDD.  They are also covered by the labor code and are entitled to unemployment insurance.  It is important that you evaluate each worker carefully and be sure that they are classified correctly to avoid any potential problems.

In the case where someone truly is an IC, they should provide you with a completed W-9 form which gives you the information needed to complete a 1099 showing the wages you paid to them during the year.  A 1099 is required for all service providers who work as IC’s who are individuals or sole proprietors to whom you either paid or contracted for $600 or more in services.  They are not required for corporations or partnerships.  They are also required for attorneys, no matter how much you paid to them. The deadline for filing 1099’s (and the summary 1098) is 1/31/17.

Remember, to have accurate information to complete the 1099’s you will need to have completed W-9’s for all IC’s and up to date records of all payments made to them throughout the year.

Sherry Lutz Herrington is the owner of Sherrington Financial Fitness, a business consulting and accounting firm specializing in strategic business planning and solid financial accounting for businesses. She is also the author of Strong Women Thriving (https://strongwomenthriving.com/), a blog which focuses on empowering women to be financially savvy, particularly after experiencing financial abuse. Sherry is currently writing a new book that both shares her personal story and addresses financial abuse. She can be reached at hello@strongwomenthriving.com.

Leave a Comment