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The Difference Between an Employee and an Independent Contractor

business client onboarding Jul 26, 2021

An employee performs work for you under your direct or indirect supervision, during hours that you specify and conditions you control. You also withhold payroll taxes from the wages you pay him or her. As an employer, you pay certain taxes that are an expense to you on the employee’s behalf.

Independent contractors are individuals who perform a service for you, usually at a pre-arranged fee, and who also meet the following criteria:

  1. They have a business card.
  2. They submit an invoice to you for each occurrence of services rendered.
  3. You have no control over the hours worked, or the tools used.
  4. They perform similar services for others.
  5. They do not have any major responsibilities within your organization, such as management or supervision of employees.
  6. A contract or work order exists between you and the independent contractor.
  7. They supply you with a business license number (issued to them by the city in which they work).
  8. They may also show evidence of being licensed by the state; for example, doctors, lawyers, electricians, etc.

The above items are intended to be a quick guideline and are only a portion of what determines worker status.

Some examples of independent contractors include:

Janitors, Plumbers, Accountants, Lawyers, Electricians, Landlords, Painters, Consultants, Salespeople, etc.

It is important to properly classify the people you pay. If you pay someone as an independent contractor and he or she is in fact an employee, an audit by state and/or federal agencies may prove costly to you. Back taxes, which should have been withheld, could be assessed against you. Penalties for failure to report employee earnings could also be assessed, as well as penalties and interest for delinquent withholding payments.

Internal Revenue Service 20 point Checklist for Independent Contractor (download)

If you want to improve your business situation, get assistance now. Schedule your free consultation today or give us a call at (218) 491-4002. We're here to help!

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