Employee or Contractor?

You Don't Get to Choose...The Working Relationship Does.

One of the biggest misconceptions among new business owners is that you can simply decide whether someone receives a W-2 or a 1099.

Unfortunately, that's not how it works.  The government doesn't start by asking how you labeled them.  It starts by asking one question: Who controlled the work?

We like to say they are likely an employee if you tell them what to do and when to do it.

Contractors are usually a ‘hands-off’ relationship- something they could do when your business is closed and requires no oversight, such as accountants, event photographers, lawncare, janitorial and information technology services.

The janitorial company decides:

• when to clean,

• who showed up,

• what equipment to use,

• how the work was performed.

That's very different from hiring someone to report to your office every morning at 8:00 and follow your instructions throughout the day.   

Most worker classification problems don't start because a business owner intended to break the rules.  They start because everyone was happy... Until they weren't.  Then one complaint opens the door to questions about payroll taxes, workers' compensation, unemployment insurance, overtime, and more.

One reason business owners are tempted to classify workers as contractors is because employees cost more than their hourly wage.  A general rule is add 10% of the pay to estimate the business’s portion of payroll taxes.  If you pay $15.00 an hour, assume $17.50 for cash flow purposes.  In short, a little extra cash can save you a whole lot of money (and stress) to know you’re abiding by the rules.

If you're deciding between a W-2 and a 1099, don't start with the tax forms. Start with the working relationship. Getting it right from the beginning is much easier than fixing it after someone files a complaint.

✔ Bottom Line.

Look at the relationship.

This article is provided for general educational purposes only and is not intended as tax, accounting, legal, or financial advice. Laws and individual circumstances vary, so please consult a qualified professional regarding your specific situation.