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  • Melissa Leediker

You're hiring! Are your workers contractors or employees?


Congratulations! You've grown your business and need to hire. Let's make sure you classify your workers correctly.


There are LOTS of things to consider when you bring on contractors or employees. It's common to default to hiring workers as contractors to save on payroll expenses, but that might not be the right way to handle it.



Let's get started working through the rules to see if they're contractors or employees. There are 3 main areas to consider in making this decision.


1) Behavioral Control


Type of instructions given- if the business specifies things like where work is completed, what tools and equipment is used, who else can help with the work, where to purchase materials from, what process is used to complete the work it's likely it's an employee-employer relationship.


Degree of instruction- if the business provides more detailed the instructions, it's more likely to be an employee-employer relationship.


Evaluation systems- if the business has a system to evaluate how the work is performed, not just the end result, it's more likely to be an employee-employer relationship.


Training- if the business is providing training on how to perform the work, it's very likely to be an employee-employer relationship.


2) Financial Control


Significant investment- if the business provides the majority of the equipment (taking on a larger amount of the initial investment, it's more likely to be an employee-employer relationship. Though, some industries, like construction, generally have a high initial employee investment for tools, but can still be employees, rather than contractors.


Reimbursed expenses- if a business is expecting to reimburse for all worker expenses, it's more likely to be an employee-employer relationship.


Opportunity for profit or loss- if the business is determining the profit and loss the worker earns, it's more likely to be an employee-employer relationship.


Service availability on the market- if the business doesn't allow the worker to offer services openly on the market, it's more likely to be an employee-employer relationship.


Method of payment- if the business determines the method of payment, it's more likely to be an employee-employer relationship.


3) Type of Relationship


Written contracts- if the business has a contract stating the status of the relationship that is not sufficient to ensure it's treated as such for tax purposes. Other factors must also point to that relationship.


Employee benefits- if the business offers benefits to the worker, it's more likely to be an employee-employer relationship.


Permanency of the relationship- if the business expects the relationship to continue indefinitely, it's more likely to be a employee-employer relationship.


Service(s) provided are a key activity of the business- if the service(s) provided are a key activity of the business, it's more likely to be an employee-employer relationship.




Sources:


IRS Website on worker classification


Department of Labor Fact Sheet on Worker Classification


Texas Work Force Commission Employment Status Sheet




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(817) 422-0900

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