Hiring Mistakes: Employee vs independent contractor
Hiring your first employee is exciting… and stressful! It can be a minefield of red tape and endless Googling trying to figure out what you need to do and most importantly, how to do it right.
Many businesses solve this problem by calling their new hires “independent contractors” whether they are or not. It’s perceived as an easy out for a few reasons:
They skip the payroll and unemployment taxes.
They skip having to pay for workers comp insurance.
They skip the payroll systems and send their “independent contractors” their pay via Venmo or similar program.
They skip the paperwork and legal filings involved with hiring.
They skip having to follow laws for offering benefits, time off, breaks, overtime pay, and more!
Sounds pretty good if you’re the employer footing bill right? Who needs the headache?!
So what’s the problem?
Misclassifying employees as independent contractors can result in fines, back taxes, and higher tax rates in the future, depending on what state you live in.
It also usually means unfair practices towards your workers and they are likely to jump ship in favor of better pay, benefits, etc. They do not want to pay extra for all the self-employment taxes, not receive over-time, not get breaks, and well, you get the picture! You will not grow a successful business by mistreating your workers.
Who needs the headache now?!
How to classify:
So how do you know if you should classify a new hire as an employee or an independent contractor? There are a lot of guidelines on this but here’s how we break it down in layman’s terms:
Independent Contractor
Works for themselves - has an established business offering the service you’re hiring for. They have tools, supplies etc. They’re probably guiding and advising you on how the job should get done.
Employee
Works for you - you train them and direct their work. You designate their hours, tell them how to do the work, and supply them the materials to do the job.
Let’s go over a few scenarios to clarify these definitions.
A chicken farm hiring part-time weekend help feeding chickens, gathering eggs, etc. >>> Employee
The chicken farm hiring a professional handyman to make occasional repairs. >>> Independent Contractor
A restaurant owner hiring a social media expert to handle their accounts for them. >>> Independent Contractor
The restaurant hiring a someone in-house to handle the social media accounts. >>> Employee
An event company hiring for a month long festival. >>> Employee
The event company hiring for a one day event. >>> Employee
These are some of the common misconceptions I see when businesses try to get away with hiring people as independent contractors instead of employees.
When it’s only for a short time.
Remote work.
Part-time positions.
They think they’re too small a business for anyone to notice and they’ll be fine.
When in doubt… I’ll just say it, you’re probably hiring an employee. Always check your state’s guidelines. You can also call your insurance company for whether you’d need worker’s comp insurance for the job or not, this will help define the role! And of course, you can always get in touch with Enhanced Business Coaching to help with defining your hiring needs.
