By Bill Morgan & Tom Filesi

Growth of a new business is great but . . .  one of the many issues confronting a growing business is whether the need for additional personnel would best be fulfilled by hiring employees or retaining independent contractors.  A major mistake made by newly minted business owners is the failure to properly determine the status of new workers. It seems easy to assume the person is an independent contractor and avoid the necessity of paying benefits, withholding taxes and making required governmental payments and filings.  However, the Internal Revenue Service and local taxing authorities apply a rather strict set of rules to determine whether a particular individual is an employee.

Three Tests You Need To Use

Essentially, should you want to hire an independent contractor, three main tests are applicable: Degree of Behavioral Control, Extent of Financial Control and the Relationship of the Parties.  Should you exercise substantially all control over the time, location and method of performing the required task you have failed the first test. Likewise, should the person performing the task be paid a set price predicated upon the number of hours worked, you have failed again.  Finally, if you undertake to train the person, supply all necessary equipment and provide some benefits such as access to the company accountant for tax advice, the person will be deemed to be an employee.

One example often used to illustrate the application of these tests is the retention of a painter to paint your house.  Other than the color you have selected,  the painter is on his or her own.  The painter brings his or her own equipment, materials and determines when and how to complete the job. Because you have agreed to a set price, regardless of the time involved, the painter assumes risk but stands to make a profit. At the opposite extreme is the hiring of a  caregiver, part-time, for your child.  You provide all necessary equipment, dictate exactly when and where you expect the caregiver to be and pay an agreed upon amount for the service.

Error On The Side Of Protecting Your Business

Nothing is easy, however, and the status of your new worker will fall somewhere in the middle of these two examples and will require thoughtful analysis to determine employee or independent contractor status. Failure to pay the required social security, Medicare and federal unemployment taxes, applicable state and local taxes, unemployment and workers compensation coverage as well as effecting the required filings can be quite costly and incur penalties.


Bill Morgan & Tom Filesi are SCORE Mentors. To learn how Tom & Bill can assist you with your business or to meet with another mentor for guidance, CLICK HERE!

Employee or Independent Contractor?