Hiring Help: Contractor or Employee?

As you grow your business, you will reach a point where you need to hire help to keep up with demand for your products/services. You might need help with packing and shipping orders, with production, or with tasks like website maintenance, customer service, and bookkeeping. You might be surprised by the IRS rules regulating how you must characterize your workers and the tax consequences of hiring them. The IRS has strict rules for determining whether your worker is an employee or an independent contractor.
An independent contractor is someone who provides their services not only to your business but to other businesses as well, and they set their own hours and wage rates, billing you for their services. They provide their own tools needed for their work and receive no benefits like paid vacations or insurance. Expenses for independent contractors can be taken in a simple manner on your taxes, and you do not have to pay worker’s comp for them or withhold self-employment taxes from their pay. Lawyers, accountants, webmasters, graphic designers, and bookkeepers are generally categorized as independent contractors, as long as they don’t work exclusively for your company.
An employee is someone who usually works at specific times agreed upon by you, is paid a rate set by you, and might not be doing this kind of work for other businesses in addition to yours. The IRS considers you to be an employer if you “control what your employee does and how it will be done” and if you “control the details of how services are performed.” The number of hours worked does not matter; even if your worker is only part-time, the correct characterization may well be employee and not independent contractor. In this case, you must purchase worker’s comp insurance, which is very expensive, and you must run payroll, withholding self-employment taxes and reporting quarterly payroll to the government. The easiest way to handle payroll is to hire a professional payroll service to do it for you. Some payroll services also offer worker’s comp, or you can purchase it from an insurance company or from your State Fund. People you bring into your home or office to help with things like shipping and production are likely going to be considered employees, not contractors.
Incorrectly categorizing an employee as an independent contractor could be an expensive mistake if you were to be audited, so it is best to get it right. Be aware of the distinction, read more on the IRS site, and ask your CPA for advice to understand how the rules apply to your unique situation.