Equifax

Finance Blog

Hiring Independent Contractors: What You Need to Know

Written by Michael Alter on May 20, 2013 in Small Business  |   No comments

One of the most basic steps of the payroll process is distinguishing between employees and independent contractors. However, employers are sometimes foggy on what differentiates the two types of workers. Employers should have a solid idea of these concepts because there are significant tax implications….

small business payrollOne of the most basic steps of the payroll process is distinguishing between employees and independent contractors. However, employers are sometimes foggy on what differentiates the two types of workers. Employers should have a solid idea of these concepts because there are significant tax implications.

Independent contractors are becoming more and more popular among companies because they serve an important function. Just as you might not need a full-time doctor or lawyer on staff, small businesses are starting to use independent contractors for marketing, design, and other roles that used to be occupied by a full-time person.

Our data at SurePayroll from surveying small business owners has shown a gradual increase in the percentage of 1099 workers since 2004, rising from nearly 2.9 percent to 6.7 percent.

Let’s look at how an independent contractor might affect your small business payroll:

  • Taxes. Tax withholding is not required for independent contractors. The company does not have to pay Social Security or Medicare tax or federal and state unemployment insurance contributions.
  • Work schedule. Independent contractors set their own hours and sequence of work. They can work for multiple employers, and their services are available to the public. They tend to work job-by-job rather than on a continuing basis with a single employer.
  • Budget. Employers can often save money using independent contractors, not only because of the tax situation but also because they’re not providing supplies, work space, or equipment. The independent contractor takes on the risk of profit or loss. Employers generally agree on a price or an hourly rate rather than a continuing salary with benefits and reimbursements for expenses.

There are two ways an employer can go about determining a worker’s status. One is the Common Law Test, which asks how independent the employee is based on the points discussed above. However, there are exceptions, and employers can also use the Reasonable Basis Test, which allows them to designate someone as an independent contractor for tax purposes if there is a reasonable basis to do so.

A worker or employer may request the IRS’s determination of the worker’s status by filing Form SS-8.

The next question becomes how you decide what kind of worker you want to hire. Before you make the decision, consider a few more factors:

  • Need. Are you working on some type of seasonal campaign or a one-off project for which your current staff doesn’t have time? If so, consider an independent contractor. If you’re generally understaffed, however, and you need someone you can count on for more than just a few months or a year, you may want to consider adding a regular employee.
  • Cost. As long as the person meets the criteria for an independent contractor, hiring this type of employee can mean savings over the long term, though you might pay more short term on an hourly basis.
  • Dependability. This is an issue with anyone you hire, but with an independent contractor the required supervision should be much less. Do your research when hiring so you can be confident you’re getting someone you can trust to work on his or her own.

Finally, remember that even though you are not required to withhold taxes on an independent contractor, you still must fill out the Form 1099-MISC. If you have questions on this, be sure to talk with an accountant or your payroll services provider.

Michael Alter is president and CEO of SurePayroll, a wholly owned subsidiary of Paychex. SurePayroll provides payroll services for small businesses.

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Stay Informed Sign up for our FREE Equifax email Newsletter