As a small business owner, you may need help running your business. Hiring someone can ease your workload, but proper classification matters: misclassifying a worker can lead to penalties from tax authorities. Understand the difference between employees and independent contractors before you hire.
What is an Employee?
Employees are workers you hire to do ongoing or regular tasks for your business. They are typically an integral part of operations and receive most or all of their income from you.
You set employees' work hours and schedules, and failure to appear for assigned shifts can be grounds for discipline or termination.
When you pay employees, you are responsible for withholding taxes and providing required insurance coverages. Employees usually receive a regular paycheck and use your tools, equipment, and materials to do their jobs.
What is an Independent Contractor?
Independent contractors are self-employed professionals who take on temporary or project-based work. Examples include plumbers, freelance writers, and cleaners who work for multiple clients rather than relying on one employer.
Contractors typically provide their own tools, set their own schedules, and handle their own taxes and insurance. You should have a written contract that specifies pay and project milestones, but you do not direct day-to-day methods or micromanage how they complete the work.
For more guidance on hiring and classifying contractors, see Understanding Independent Contractors for Small Businesses.
Use this checklist to determine if the workers you hire are employees or independent contractors:
- Do you or the worker provide the tools, supplies, equipment, and materials?
- Do you or the worker set the schedule?
- Is the work permanent or temporary?
- Are workers micromanaged, or allowed to complete the project on their preferred timeline?
- Do the workers rely solely on you for income or do they have multiple clients?
- Do you pay taxes and insurance for the workers, or are they responsible for those obligations?
- Are the workers an integral part of your ongoing business or needed only occasionally?
Employees and independent contractors are different in how they are paid, supervised, and integrated into your business. Protect your business and your workers by determining the correct classification before hiring and by documenting the relationship.
Consider relevant insurance options and industry-specific coverage such as Independent Sports Leagues/Camps/Clinics Insurance when you add outside workers to your operations. For specific questions, talk to your agent.
Frequently Asked Questions
How do I decide whether to classify a worker as an employee or contractor?
Use the checklist above to evaluate control, permanence, tools, and financial dependence; consult a tax professional for complex cases.
Do independent contractors need a written contract?
Yes. A written contract that defines scope, payment, and deadlines helps protect both parties and clarifies expectations.
Am I responsible for contractors' taxes and benefits?
Independent contractors are generally responsible for their own taxes and benefits; employees require employer withholding and may be eligible for benefits you provide.
What should I do if I'm unsure about a worker's classification?
If classification is unclear, seek guidance from a payroll specialist, tax advisor, or employment attorney before finalizing the relationship.