Employee or Independent Contractor?

When bringing on new staff, many business owners are vexed by the question: Should I bring this person on as an employee, or can I treat them as an independent contractor? There are tax and legal implications for both.  While we can’t give any legal or HR advice (and please don’t construe this as either one), we can give  you some guidelines and resources to help figure it out! 

How is “Employee” defined? 

The IRS has a definition of an employee, and each of the 50 states has their own definition, as well.  In general, if you have control over how, where, and when your staff does their job, they are considered your employees.  If they are your employee, you are required to pay employment taxes for them, and withhold taxes on their behalf.  

If a person is working at your company full time, it is difficult to make the argument that they are an independent contractor.  However, if you have unique circumstances, you will want to consult with an employment attorney to create a policy around who is considered an employee for your specific industry.  

What is an “Independent Contractor?”

On the other hand, if you contract with a person and they can set their own hours, they are responsible for their own benefits, and provide their own tools and equipment, you generally can consider them an independent contractor.

Each of these definitions carry their own sets of facts and circumstances that are tests that the states and federal agencies apply to ultimately determine the status of an individual. 

We have an employee - now what? 

If you have determined the person you are bringing on is an employee, you will need to add them to your payroll system and collect a W-4 form from them.  You also need to fill out a Form I-9 to confirm they are eligible to work in the US. 

Independent contractor Reporting  Requirements

If on the other hand you have decided your person is a contractor, you will need to collect a W-9 form from them.  At the end of the year, if you have paid them $600 or more for services, you will need to send them a 1099 form that reports their earnings to them from your company. 

It is important to note that it is the payer who bears the burden of reporting to the IRS. If a business fails to issue a form by the 1099-NEC or 1099-MISC deadline, the penalty varies from $50 to $270 per form, depending on how long past the deadline the business issues the form. There is a $556,500 maximum in fines per year.  

What should you do if a vendor refuses to give you a W-9?  You have a couple of choices. You can’t withhold the payment if they have already provided services, but the IRS does require that you do backup withholding on the payment at 28% on their behalf.  This will usually motivate the vendor to provide the information.  If the vendor insists that the payment be made “under the table” you likely will want to discontinue doing business with them.  If payments are not reported on a 1099, they are not deductible for income tax purposes.  

Your client manager at Sherwood Tax is happy to help you navigate this with your vendors and make sure you are compliant with all the reporting requirements.  Feel free to reach out to us with any questions!