How to Treat Employees vs. Independent Contractors
The distinction between employees vs. independent contractors causes constant confusion for our small business clients. Employees and independent contractors are completely separate classifications. An employee cannot be an independent contractor and vice versa. Businesses must pay employment taxes for employees and provide them with a W2 at the end of each year for taxes. Businesses are generally required to give independent contractors 1099 forms for tax purposes. A “1099 contractor” is an independent contractor. There is no such thing as a “1099 employee.”
But how do you treat employees vs. independent contractors? We have a few guidelines to help.
Employees
If you decide to bring on the worker as an employee, make sure you pay the right taxes and follow employment laws.
- Taxes: Businesses are required to withhold various taxes, like income tax, Social Security, and Medicare from employee wages. The easiest way to do this is typically to hire a company to run payroll and pay these taxes for you automatically.
- Tax Forms: You will need to get a W-4 from your employees when you hire them and send them W-2s every year (payroll companies usually handle W-2s also).
- IDES: Every newly-created employing unit in Illinois must file a UI-1 report within 30 days of the date upon which it commences business (ask your payroll provider if they handle this).
- Control Over Employee Work: You can generally control as much or little about an employee’s job as you want to – tell them what hours to work, give them specific instructions, etc. – within wage and hour regulations.
- Follow Employment Laws: Our employment toolkit can help with that! It’s not an exhaustive list of every employment law ever, though, so pay attention to employment laws that you find and talk to a lawyer about your specific situation.
Transitioning Independent Contractors to Employees. If you have workers that you’ve been treating as independent contractors but now think might be employees, we recommend talking to a lawyer to figure out the best way to handle the situation.
Independent Contractors
If you decide to bring on a worker as an independent contractor, we suggest discussing with a lawyer to make sure the worker qualifies. If, after that discussion, you choose to bring on the worker as an independent contractor, you should use the correct tax forms, limit your control over the services provided, and have a written contract in place.
- Taxes: You don’t pay any taxes for independent contractors, so you don’t need to withhold taxes from their payments. Independent contractors are considered self-employed, so they pay their own taxes.
- Tax Forms: You need to issue any independent contractors you paid $600 or more in compensation a completed 1099 form each year. An accountant can usually help with this.
- Limit Control Over Their Work: Make sure you don’t exercise too much control over an independent contractor’s work. Doing so could lead a government agency to decide that the worker should really be classified as an employee. We have some rules of thumb (though there may be exceptions).
- Don’t specify the contractor’s work hours.
- Don’t provide instruction manuals or employee handbooks.
- Don’t offer training – a true independent contractor should know how to provide the services.
- Contracts: We highly recommend having all your independent contractors sign an attorney-drafted contract stating that the worker is an independent contractor and laying out the terms of the relationship.
We hope this sheds some light on the operational differences between employees vs. independent contractors. If you’d like more specific guidance for your business, please get in touch!