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Contractor or Employee? Get the Facts Before You Hire

January 27, 2010

Independent contractors are an attractive option for small businesses that don’t have the resources or need for full-time employees.  In fact, your small business may be built entirely on serving as an independent contractor to other enterprises. But before you hire one or more independents, make sure that relationship fits entirely within the IRS’s definition of contract labor, and that both you and your contractors understand the rights and responsibilities of everyone involved. 

Deciding who can legitimately work as an independent contractor and who must be given employee status has become a difficult matter for small business owners. You can’t simply choose what’s best for you. The IRS and equivalent state agencies are strict on worker classification issues. Remember that independent contractors work for themselves. They operate their own business. You are their client, not their employer. You don’t dictate their hours or control how they perform their work. In the eyes of most government agencies, a worker is an employee unless you can prove otherwise.   

Contractors control when and where they work. Avoid setting a pattern of daily or weekly work hours dictated by your business. Also, independent contractors do not usually have a permanent or continuing relationship with the business and have time to pursue other clients. Plan to compensate contractors on a per-job basis, not weekly or monthly. And since contractors are paid to complete a set task, they may bring in others to help, at their discretion and on their payroll. They also should use their own tools and technology and be responsible for their incremental expenses. 

Contractors can’t be fired as long as they produce results that meet their contract specifications. Do not include them under any insurance or benefits coverage you have for employees. Independent contractors are subject to making a profit—or suffering a loss—based on their own skills and expertise. Always require an invoice before making payment. 

Understanding the requirements of using independent contractors will help you better determine whether such relationships are right for your current business needs, or if you need to hire them as employees.  Also make sure your contractors understand the rights and responsibilities involved as well.  This will help prevent misunderstandings and potentially costly disputes over benefits and compensation.  

Getting sound advice on management issues such as independent contractor status is vital for your small business. For help, contact Lancaster SCORE, “Counselors to America’s Small Business.” SCORE is a nonprofit organization of more than 50 volunteer mentors who provide free, confidential business counseling and training workshops to small business owners. Call us t 717-397-3092 or find us online at www.scorelancaster.org.

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