Employees and Freelancers and Independent Contractors--Oh My!

"Aw, c'mon," you cry, "so what if I have my friend's daughter coming in to handle my bookkeeping and I just pay her hourly?" Well, that "so what" could cost you thousands of extra dollars in penalties and interest if you don't classify your "work force" properly.

Whenever your business benefits from someone else's time, intellect and labor, you want to be sure you know what class of worker you're dealing with. It makes a difference. If you're hiring an independent company to handle your IT tech support, you'll have certain rights and obligations. Basically, you'll have the right to expect a certain level of service and you'll have the obligation to pay the fees you agree to pay. If you hire a receptionist to answer your phones from 9 to 5, you're looking at a different set of rights and obligations. In addition to paying a salary, many states require that you also pay for certain benefits and withhold taxes on behalf of an employee--which you don't have to do with an independent contractor.

So how do you know which is which? As I mention in my article, "Walking the Employee-Independent Contractor Tightrope," the answer often comes down to "control." How much control do you have over the work this person is doing for you? Do you:

• Determine the hours of work?
• Provide the tools or equipment (such as computers) to do the work?
• Offer training to get the work done?
• Dictate where the work has to be performed?

The more questions like that to which you answer "yes," the more likely it is you've hired an employee. As a result, there are many more obligations (legal and financial) that now rest on your plate as an employer.

A murky area arises when business owners hire workers on a part-time or as-needed basis. Are these people part-time employees or independent contractors? The lines can easily get blurred. And ending up on the wrong side of the line can also harm you personally--as government authorities in some states have the right to look past your corporate (or LLC) entity and into your personal pockets to make sure that the right taxes get paid. To steer clear of this mess, consider consulting an attorney who understands employment issues so that you can prepare yourself properly.