Building Your Team for Success: Independent Contractor or Payroll Employee?

Hiring Payroll Employees is a BIG responsibility, requiring extra paperwork, costs, and complying with labor laws. They should be seen as a valuable asset to your company and, in return, you should be able to take care of them well.

You pay a “Company Share” (or ½) of their Social Security and Medicare taxes, which is 7.65% of their gross pay. You also pay Unemployment Insurance, which is at an experience rating – anywhere between 0% and 7% of their gross pay. You withhold the employee’s share and pay it when due. You also pay Worker’s Comp Insurance and maybe other benefits.

Hiring an Independent Contractor is usually more expensive because they, or their firm, bear these responsibilities on their own shoulders. You must request a Form W-9 from them if you pay more than $600 per year … and then at the end of the year prepare Forms 1099 and 1096 to report what you paid them.

The IRS gives you 3 things to consider from Form SS-8:

1. Behavioral Control

For a Payroll Employee, you:
•    Give instructions on how to do the work.
•    Train the worker how you want it done.
•    Control the worker's time and activities.

For an Independent Contractor, the worker:
•    Comes fully trained and equipped to do the work.
•    Is free to come and go as needed.
•    Has their own business and brings services to yours.

2. Financial Control

For a Payroll Employee, you:
•    Set the rate of pay to the worker.
•    Set the hours for the worker.
•    Pay the taxes for the worker.

For an Independent Contractor, the worker:
•    Sets their own rate and pays their own taxes.
•    Invests in their work (tools, insurance, knowledge).
•    Is not necessarily reimbursed for expenses.

3. Relationship of the Parties

For a Payroll Employee, you:
•    Pay vacation, holidays, sick pay, etc.
•    Must pay unemployment on the worker.
•    May need the worker to be permanent.

For an Independent Contractor, the worker:
•    Is independent and can do work for other businesses.
•    Can terminate the relationship without incurring liability or penalty, and so can you.
•    Makes a contract with you for services provided.

For example, I am an Independent Contractor. I have employees. My company provides professional services to small businesses, to government agencies, and to nonprofits.

One of the most challenging pieces of my business experience has been learning how to be an employer. How to trust my own judgment, keep my business under control, and lead consistently. My employees have to reflect my entrepreneurial vision. I have to take care of my employees, because they are depending on me for a paycheck. When I hire another independent Contractor, it is because I am in need of their expertise, but they are Independent (keyword).

This article is provided by Connie Harvey, Owner of Efficiency Counts, Inc, crh@efficiencycounts.com, 402.460.6216. Connie is in her 11th year in the business of helping other businesses do a better job of tending their Books. A 2004 graduate of McCook Community College and a QuickBooks ProAdvisor, she serves on many Financial Boards and the Center for Rural Affairs Board of Directors, we're proud to say! She originally wrote this article for Central Nebraska's Resource: Open for Business.