Has your business grown to the point where you are considering adding additional staff? Great! One of the questions you might be asking is if you should hire an employee or an independent contractor? Or perhaps, you are considering becoming an independent contractor yourself? Regardless of the situation, there are a number of factors to consider prior to making your decision.
You may be wondering why it is so important to choose one classification over the other. What difference does it really make? And who determines who is an employee and who is an independent contractor? Needless to say, the IRS cares a great deal how an individual is classified, and so should you. Ultimately it is the IRS who determines what constitutes a valid contractor vs. employee classification.
There are three areas to be examined when determining if an individual should be classified as employee or independent contractor:
Do you have a written employment contract in place clarifying the relationship as either contractor or employee? Having a written contract aids in defining the classification.
Classifying an individual as contractor or employee affects how the individual is paid. Independent contractors are not on your payroll and you, as the employer, do not have to withhold employment taxes.
As of today independent contractors may receive up to $600 in compensation from you before you are required to report the income on Form 1099-Misc.
Keep in mind, that if you are the independent contractor, you will need to file a W9 with the business you are contracting with. In turn, they have to report the income on a Form 1099-Misc. (Many of you already receive these from insurance companies that pay you.)
Determining the proper classification can be confusing and challenging. It is up to you, the business, to choose the proper classification. If you are unclear what classification to choose, seek proper professional advice. You may also file form SS-8 "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding" with the IRS to help you determine the proper classification.
Further information can be obtained from the IRS.
About the Author: Barbara C. Phillips, NP is the founder of NP Business™ and Nurse Practitioner Business Owner™ and works with NPs to get started and grow their own business. To sign up for "Progress Notes", weekly business tips in your inbox, and to claim your gift just for reading, visit NP Business Tips or her blog at NP Business. Feel free to add your comments in the forum, the Facebook page or on my NP Blog.
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