In the United States, there are two broad categories of workers—employees and independent contractors. Employees tend to work for a single company and contractors tend to do a very specific task, such as graphic design or accounting, for multiple businesses. Employees work hours set by their employer and contractors are free to set their own hours. Employees can receive employment benefits and contractors do not. Employees generally work at their employer’s place of business and independent contractors are free to work wherever they want. The IRS has established specific guidelines that determine when a worker can be classified as an employee or an independent contractor. You can read more about these rules on the IRS website or by searching “employees vs. contractors” in your search engine of choice.
In my business, I currently have two employees other than myself and a number of contractors that work on specific projects for me. Generally, you would hire an independent contractor when you have a small project that has a defined end date. For example, if you want to have your website redesigned, you are probably going to hire someone as a contractor and not an employee because after your website is complete, you won’t have any more work for them. People that perform the same task for many other companies, such as legal services or accounting, will probably be hired as independent contractors too.
For people that are going to work a large number of hours in your business that you have to train, it just makes sense to hire them on as employees and run payroll. Some entrepreneurs try to save a bit of money by classifying people as contractors that really should be labeled as employees, but this is not a good idea. When you do this, you are only saving money because you are shifting some of your tax burden onto your team member. The IRS may also come after you for labeling people as contractors that really should be employees.
If you have never hired an employee before and run payroll, it can be a scary process at first. You may have to submit your new hire to your state. They will need to give you a W-4 form and you will need to take money out of their paycheck and send it to the IRS. You will need to pay state and federal unemployment tax too. There is a bit of a learning curve to running payroll, but you don’t actually have to know how to do any of this stuff yourself. You can hire ADP (www.adp.com), PayChex (www.paychex.com) or a local accountant to run payroll on your behalf. You can tell them what hours your employee worked and they’ll take care of all the forms and filing for you for a small fee. There are even companies that will help setup a 401(K) plan and a health insurance plan for your employees and will do all of the heavy lifting for you.
Please do not rely on this chapter as your only resource when it comes to hiring and working with contractors because I don’t know anything about your specific situation and I have no specific professional training on employment law. If you have questions about whether or not someone should be considered a contractor or employee or have a question about how to hire an employee, take the time to check with your state department of labor or another qualified professional to get specific advice about your business.