Contractor or Employee?
How to Tell the Difference

You took the steps and started your own business! Whoo hoo!  Welcome to self employment. 

As you know by now, there are so many hats to wear when you run your own business, and you’re to the point where you could supply a hat factory.  So now what? 

Time to start handing those hats off to others.  

Maybe when you started out, you DIY-ed your website.  It was good enough to start, but now you’re ready to level up. Let’s hire someone to design a new and improved site. 

Or maybe you want to hand off  the labor part of your biz, while you focus on bringing in the sales.  

But will these people be contractors or employees?  Let’s figure it out.

INDEPENDENT CONTRACTORS

When you have someone do specialized work for you, and they have their own company or are freelancers… they will likely be a contractor. 

Let’s take the website designer for example… they may come to your place to offer a consultation and show you what they can do to spruce up your site, but they work independently from your business. They make their own hours, they pay their own insurance and taxes, and use their own equipment.  

Hands down, you just hired a contractor.  You have a specific project they are completing for you on their terms, not yours.  They give you a quote or estimate of what the job will cost - you are not telling them what you will pay them per hour or covering them on Workman’s Comp.

These individuals will need to fill out an IRS Form W-9 if you will be paying more than $600 by Cash, Check, or ACH Transfer. At the end of the year, you would send out a 1099 Form.

EMPLOYEES

But… what if you have a foam or party rental business and you want people to run the parties for you?

Well, if you are telling them where to go, how much you will pay them, and they are using your equipment, these would be considered employees.  Even if it is a few hours a week (Part Time Employee) or only during summer (Seasonal Employee), if you are calling the shots, they are employees.  

In this case, you will need the individual to fill out an IRS W4 Form, a I-9 Employment Eligibility Verification form, and any state required forms.  Worker’s Compensation Insurance may be required in your state, and you will need to deduct Federal and/or State taxes from their checks and pay any Employer’s payroll taxes.  

Oh yeah… and you’ll need to send them a W-2 at the end of the year, breaking down how much you paid them, the taxes deducted, Social Security, garnishments, benefits, etc.  There's a LOT to do.

PAYROLL COMPANY?

This all can sound VERY intimidating, I know.  SO many forms, different tax rates, etc… how will you ever remember everything?  

Here is the GREAT news… you don't have to!  There are full service payroll companies out there that can do most of the work for you, at VERY reasonable fees.  My favorite is Gusto.

Gusto has the capability of running payments for both Employees AND Subcontractors.  

They offers different levels of monthly service, including some of these features:

• Full Service Payroll (W-2s AND 1099s)

• Multi-State Tax Processing

• Employee Profiles with access to Pay Stubs

• Onboarding Tools

• Worker’s Comp Administration

• Integrations with QuickBooks and other financial software

• Time Tracking

• Next Day Direct Deposit

• Payroll and Time Off Reports

You have the ability to enter and/or approve hours, and run a payroll weekly, bi-weekly, and even one off payments (termination check, bonus check, and more) with no extra fees. 

My clients are using Gusto, and they love it because it is very user-friendly.  

I think you'll love it too.

Want to try Gusto out? Use my referral link and after your first paid month, you will receive a $100 Visa Gift Card.

*Disclosure: I only recommend products I would use myself. All opinions expressed here are my own. This post may contain affiliate links and I may earn a small commission, at no extra cost to you.