ready to hire a worker

I am getting ready to hire a worker. How do I know if I should pay them as a subcontractor or an employee?

The benefit to classifying a worker as an employee is that the employer can control the methods and results of the work to be done with full-time workers who work only for the employer, and workers trained by the employer. The downside is that an employer-employee relationship also brings obligations - income and employment taxes, unemployment insurance contributions, workers' compensation premiums and so on.

The benefit to classifying a worker as a subcontractor is that it is often less expensive for a business to use independent contractors because the taxing and reporting requirements are less costly than they are for employees. Employment taxes do not need to be withheld from an independent contractor's payments or matched by the employer. Employee benefits do not have to be funded, paid or administered on the independent contractor's behalf. The down side to using an independent contractor is when this is not the correct classification of your worker it can cause the employer to be responsible for paying all payroll taxes related to the worker's compensation, as well as penalty and interest for these payments. There are other ramifications as well from different agencies: Worker's Compensation, Unemployment Compensation, ERISA, Department of Labor, etc.

One rule for determining if a worker is an employee is called the "Common Law Test". The most important question that this test asks is: who has the right to control what work will be done and how that work will be done? If the employer has that right then an employer-employee relationship exists and the worker is an employee.

The test continues on to ask further questions regarding direction and control of a worker. Some of the questions to determine the employer-worker relationship are: what level of instruction does the business give the worker? What level of training is provided to the worker? Does the worker have un-reimbursed business expenses? Does the worker have a significant financial investment in the work? Are the worker's services available to other employers? How is the worker paid, hourly, salary, or by completed project? Can the worker incur a loss or a profit by performing work or services? And the questions go on from there!

The best way to make a determination in this circumstance is to leave it to the tax professionals. When hiring your first worker, and trying to determine the employment classification of that worker, it is best to contact your CPA or business attorney. Your CPA or business attorney will be able to guide you through the determination testing, but more importantly, they will be able to tell you what the standard is for your company's industry.

Meg Eynon started at the Payroll Factory in 1994. With a BA from West Chester University she looked for opportunities to build a life as a business professional. Meg's dedication to customers and quality was rewarded in 2000 when she was promoted to Vice President.

Meg loves her job and the company she helped build. She likes that The Payroll Factory's full service team helps clients grow their businesses by providing advice in the areas of payroll processes, procedures and protocols; eliminating the need for small business owners to divert their attention from running their businesses.

Meg resides in Pennsylvania and in her spare time loves to read and spends a good deal of time playing, gardening and cooking with her husband and son.