The Contractor Employee
Written By: Y. Michelle Coard
The Audio has additional information and discussion.
What is a contractor employee? If you said it is not a thing then you are correct. However, every day I see how people hire a contractor only to treat us like an employee. I know in certain people groups this is fine, but they do not understand the future problems that will arise with the contractor employee misclassification. When we, business owners, hire a person the word categories tell us how to treat the worker (laborer) for taxes, benefits, time, management, and the job positions. Can a contractor become an employee? Yes, a contractor can be hired on as an employee but with the official paperwork provided by you, the employer. Remember there are more responsibilities that come with hiring an employee.
Since most people know the difference as far as an employee requires tax withholding and a contractor does not but they believe that is the extent of the difference. I will provide links to a couple of my blogs to help you learn more if you do not know the differences between hiring either type. The business owner’s mindsets affect our profits and if we have a wrong understanding conspiring how to work together it can cost time and money down the road. I recently realized that other business owners know the term contractor, but they wanted to treat me like an employee without the responsibility. Most people know they do not have to pay taxes or benefits for most contractors, so they love to hire a “contractor” but try to control us like an employee. I know this works in normal business because contractors do not understand they are not employees. Most contractors end up in a tax bind and limit earning potential because they allowed their clients to treat them as employees.
Also, many contractors are under the mindset they will not owe taxes like a business owner. The level of error around who and when must pay taxes is a mixed problem of ignorance and miseducation. The big business expects the small business owner to struggle and do not see us, the small business owner (contractors) as competition because they know contractors do not fully understand business management, employee management, contractor relations, accounting, and other business processes. Big business hires and listens to professionals and big business roll-out programs, as an added stream of income to the small business owner, but the programs partially train the small business owner. Another reason that only taking advice from people that earn money without the full picture will cost you money. Do you know how many “big businesses” close each year? Since the small business owner normally believes they do it all themselves they try to hire free labor or low ball pay a professional, that can help them, you the small business owner, end up undertrained in business and accounting processes. Please stop listening to other untrained business owners because you are all in unproductive cycles. Please stop pretending to take the advice you do not want because I will still charge you.
An accountant is not a human resources director, but the accountant helps with how to pay and manage payroll, budgets, tax management, and payments. Often people put accountants under human resources but do not understand HR does not understand accounting and should work with accounting, not over us. Although both departments work together the HR department is the small business owner because you have paperwork and labor requirements that you must manage for the employee. But a contractor is a vendor, so you would still have paperwork because contractors have their own terms of services and service agreements, call the source documents. The contractor supplies the documents, and you sign and pay when in agreement with their pay for services offered. An employee is given the employment paperwork after they accept the job description and your, the employer, salary offer to them if they agree to your terms. However, this has somehow turned into a backward process that the client giving offers to the business owner (contractor.)
An employee would give an interview free for the employer and the employee, as in no meeting fees. And some potential employers pay to bring in certain people for the interview paid by the company. However, all meetings need to be paid consultations for business owners as the business owner is interviewing the potential client. I remember when I was following the bad advice of a business mentor that she told me sales appointments needed to be free. I am not sure when this trend occurred but down the road, I realized it created the wrong mindset in what should be a client to make them think they were my employer.
2020 things became clear as more people would say things like, “let me check your work” before they would pay me,” although in my terms of services I clearly stated the payment was due before the work was provided so people will stop cheating me out of work. You really do not know how many people force-free labor by skipping out on the bill. I also heard things like you are “on my team” and I noticed they would expect to manage my time. I noticed certain clients did not expect me to have other clients, yet I did not receive a salary. So, it was like a war, back and forth, as they expected me to be a contractor employee. Of course, this causes more problems because in communication they understand they can not do this but do not care. I started getting calls from people that would say, “can we meet to see if you are a good fit for a position in my company,” but they knew I was a contractor. Finally, I said sure, make and pay for an appointment, as I am a contractor, not an employee. Now I have a professional-client interview set up to decide if we are a good working fit. I work “with” the business owner and not “for” the business owner.
I realized people knew they could get away with treating contractors like employees and the contractors accepted this mistreatment. Since I know better, I can operate in a better fashion and not allow them to push me around. I have conversations, videos, and blogs to help prepare people to understand how a contractor/client relationship works so that we do not end up in a misunderstanding.
Hiring an employee requires a hiring process and employee management and you must have the ability to be able to cover the cost of having an employee. If you want an employee but want to avoid the costs associated with taxes and benefits you are violating ethical and labor laws. Since most people still believe the handshake works although they have experienced issues with people not keeping their word with oral agreements. Written agreements and mutual understanding are essential to your business's success and profits. Cheats and liars live to change agreements as people do not believe keeping their word is important even with a written agreement but hold them to that agreement.
Many people think I make the hiring process harder than it must be at least until the government and state catch up with them. Many will pretend not to understand the process, so I must limit phone calls (unless recorded) to email to show proof that I gave them the information as to my classification as a business owner or an employee. When people use the term “employee” for a contractor I let them know you have to be careful with the terminology because the government takes it seriously. The difference determines the taxpayer so they can get paid.
Contractors (business owners) protecting your business is important because there are lots of liars out there. Watch out for the phone calls that the people you work with think they need to get straight about working for them. Help them understand you do not work “for” them, but you work “with” them, and you have other clients. Most people want an employee and do not understand a contractor has to earn their full income with multiple clients, so do not allow them to push you around with their poor time management habits. An employee relies on one employer for their full pay. If you are a contractor but only want one client most likely you want to be an employee so you should seek a job instead of business ownership. Or you need to charge so you can pay yourself, cover all self-employment and business-related taxes and business expenses, but you cannot act like an employee. Both parties must understand the difference between an employee and a contractor and avoiding taxes is not the only determining factor.
I have a help desk system that is helpful with the service request and the reality I have other clients. The client must submit a service request, and this also helps to set the tone they must purchase a service and I will work it into the workflow. If you want to give a contractor a deadline you need an employee. If you and the contractor agree to a deadline then you can hold them to the deadline by submitting your part and holding up your part but not by trying to micromanage.
Get a clear mindset if you feel you can only get work if you agree to let your clients set your pay and control your time take back control and stand firm. People will set your prices without regard to what a business owner needs. People are selfish and will put themselves first without regard to who they oppress to get there. Learn how to price for your business or you will have an extremely tough time earning profits. The business owner sets the tone, the price, and the working times. Be clear that you have other clients because you sell your time, and your payment must be more than $25 per hour or job. Stop competing with high school works or the kids down the block. Get paid like a grown-up.
If you are seeking to be a freelancer, you are a business owner. If you are not an employee, you are a business owner whether you have an official state structure or not so stop charging like you are an employee. Be aware of unspoken expectations and have a term of service and service agreement.
Employers Employee Relationships
- The employer pays a reasonable salary such as working wage and in return, the employee only works for you.
- You can set deadlines and decide what you want the person to work on and unless you ask for suggestions and ideas this person does not have the freedom of input.
- The employer matches taxes, even if you are a non-profit or government contractor you still must match payroll taxes for FICA, pay federal unemployment and state unemployment taxes for your employees. Some companies are also required to carry other benefits for the employees.
- You control working days and hours.
- You supply the tools to your team.
- You have submitted payroll forms to this person and you pay fees related to delivering payroll.
- The Employee will receive W-2 and only for certain types of other payments a 1099-____.
Contractor (business owner) and Client Relationships
- You the contractor receive payment and set prices that you give your client during the sales process. Your client does not set your pricing. Be willing to let them go if they try because I can tell you from experience this relationship will not improve.
- You set your working hours and days and your workflow.
- You supply your own tools, and you pay business expenses that you can invoice your clients so make sure you know your pricing.
- You are only a team as in you work together but not for the client. I prefer to stay away from the “team” label because even in software it gives a wrong impression that the business owner is an employee when you join their apps.
- You need to take on other clients unless this is a big-paying client. You need to charge a markup, so you earn enough to cover your business taxes and expenses. You want to earn money in case this client goes away you do not have to close your business.
- Depending upon your type of business the client does not train you in their business processes, but you are there to provide a professional service with your experience and input. Such as an accountant, I create and sell accounting processes, money management training, and software training. I know what needs to happen in accounting as well as understanding how to use software, so I do not go by the client’s processes.
- If you work as an assistant, you are still a contractor, and the client would need to buy a set number of hours. Set expectations as the client would not control your hours but could request delivery dates and appointments all paid so you can set your schedule. If you can accommodate unplanned services, you need to factor that into your schedule, so you do not lose other clients. Be prepared to work according to your schedule as many business owners are disorganized and want people to work all over the board as they do. If you are one of those people you can change because that is not fair to other people.
- Understand payment does not move clients up in the workflow but is a requirement for service.
- The contractor is responsible for fees related to payment. If you pay say with an electronic check and the contractor would need to cover the fee for instant deposit and have a printer handy. If the contractor does not have a specific way to pay and you let them know you use electronic payments the contract is responsible for the fees. The contractor should have to invoice the client and the merchant services fees are deductible business expenses.
- The contractor will receive 1099.
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