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Millions of small businesses use independent contractors to perform a multitude of tasks. But when is an independent contractor really an employee? Knowing the answer could keep your business out of serious trouble with state and federal taxing authorities.
Initially, it’s up to you to classify and pay a worker properly as either a contractor or employee. Using contractors, of course, involves far less paperwork and doesn’t require you to provide benefits, insurance or do tax withholding, among many other things.
The biggest single consideration that determines the difference is control. According to the National Federation of Independent Business (NFIB), employees are generally subject to employer control, while independent contractors retain considerable control over the services they provide.
The NFIB, which is the largest small-business advocacy organization in the U.S., defines the two categories of workers like this:
Employee: “A person hired for a regular, continuous period to perform work for an employer who maintains control over both the service details and the final product.”
Independent Contractor: “A worker who performs services for others, usually under contract, while at the same time retaining economic independence and complete control over both the method by which the work is done and the final product.”
NFIB offers this advice on how to use independent contractors:
• Require the independent contractor to incorporate. By incorporating, the worker will be considered an employee of his or her own corporation, and not the employee of the business that hired the worker. The independent contractor’s corporation should bill the business and the business in turn should pay the corporation, not the worker personally. Almost anyone can set up a corporation online, easily and inexpensively.