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Employees vs. Contractors | Hiring For Your Small Business

Employees and independent contractors are not the same. As a small business owner, it is important to understand the differences between the two and to know which to hire under certain circumstances.

What’s The Difference? Independent contractors: • control their own work and how it’s completed. • supply their own equipment, materials, and tools. • are hired to perform short-term, temporary work. • conduct work that is considered non-integral to the business.

Employees: • are instructed what work to do and how it’s to be done. • use the company’s equipment, materials, and tools. • are hired to perform long-term, ongoing work. • conduct work that is an integral, key component to the business.

What About Taxes? If a worker is classified as an employee, you (the business owner) must withhold and pay Social Security, Medicare, unemployment, and income taxes on wages paid to the worker. You do not, however, withhold or pay any taxes on payments made to independent contractors.

Why Does It Matter? Misclassifying an employee as an independent contractor could result in expensive legal consequences. If the IRS determines your independent contractor meets its definition of an employee, you are required to:

• pay back taxes and penalties for Social Security, Medicare, unemployment, and federal and state income taxes owed. • reimburse the misclassified worker for wages they should’ve been paid, including overtime and minimum wage. • provide the misclassified worker benefits, including health insurance, retirement, etc. • pay workers’ compensation benefits for any injured, misclassified employee.

If you are unsure if your worker is an employee or an independent contractor, file Form SS-8 with the IRS. The form may be submitted by the business or the worker. Once filed, the IRS will review the facts and determine the worker’s status.

For additional information, visit the IRS website or contact our SBDC office at (712) 325-3376.

The Iowa Western Small Business Development Center is a free resource for entrepreneurs, small businesses, and start-ups in Southwest Iowa. We serve seven counties – including Cass, Fremont, Harrison, Mills, Page, Pottawattamie, and Shelby – and provide consulting services to help businesses start, grow, and prosper.

(Photo credit: Aaron van Dorn / Flickr)


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