Tax Tips

The Differences Between an Employee or Independent Consultant/Contractor

 

An expensive business mistake is to treat an employee as a contractor to save money on insurance and taxes.  This mistake will cause you to pay hefty penalties, back taxes, and fines by the Department of Labor, Internal Revenue, and State Agencies.  A contractor or independent consultant is a business owner.

What is a Contractor or an Independent Consultant?

1.  An Independent Consultant or Contractor is a business owner and can set their own prices and fees.  

2.  Clients purchase services, and this person will purchase the tools and supplies to meet the job. The consultant will invoice the client for fees and reimbursement of supply/tool purchases.

3.  Can work for other clients and companies, and is responsible for their continuing education.  

4.  The contractor or IC creates his/her schedule and will work according to how their business allows them to work.  

Business owners hiring the IC or Contractor will need to require a W-9 and submit 1099 for wages paid if this person does not have a formal business structure. The business owner does not withhold, match FICA, or submit taxes on for this person(s).

Here's an article and tips from the IRS about what how to classify IC's and Employees  http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

What is An employee?

1. An employee receives directions from the employer and must perform the job according to the written guideline or plan determined by the employer.

2. He or she can not work for other clients or companies and has an assigned work schedule.  

3. The employer provides all of the tools and supplies.  

4. Yes, you submit and match taxes, deduct benefits and garnishments, and report and carry insurance and workman comp after you have a certain number of employees. 5. You provide continuing education training to the employee.

Benefits For The Employee

ballpen business cell phone 796602The employee is there to support your dream.  Usually, an employee is hired to handle various duties inside of a business according to the business policies and procedures.  People benefit from being your employee.  Employee's benefit from working for an employer because

  • Everyone is not made to be an Entrepreneur and work better as Employees.
  • Employees can also receive assistance with benefits - Most people can not afford their health, medical insurance, but they can with the aid of a generous employer.
  • Employees are eligible for Earned Income Credit when they have reported income.
  • Employees are eligible for Social Security Taxes

Payroll and Employment Taxes:

Employers are responsible for matching Medicare and Social Security Taxes (FICA). The employer will withhold and submit Federal and State (for those that have state income taxes) for the employee.  Have your Accountant assist you with setting up your tax accounts. The expenses you pay for insurance and taxes are deductible and will save YOU the business owner money as well.

Think long and hard before you decide to treat an employee as a Consultant or IC so you can save money.  If the employee wants to become an IC, help them understand they should reach out to an accountant, and you have to let them run their business.

Would you like to have help, do you think you are ready to take on employees.  Contact B&P Accounting Solutions, Corp. to help you with payroll and human resources process.  


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