Most entrepreneurs will need to hire people to help grow their business. What most entrepreneurs don’t know though is the differences between hiring employees and hiring independent contractors. In this article, we’ll explore three key differences you should know about.
1. Control Factors
When you hire an employee, you will have a lot of control over when, where and how the employee provides services to your business. You can set hours or exert control over their method of performance, for example. But you also usually have to provide them with office space, equipment and more.
Conversely, when you hire an independent contractor, your only real control is over the timing and quality of the final deliverable. The contractor (sometimes called a freelancer) will get to decide when, where and how they perform the work. One benefit here is that you don’t have to provide office space or equipment. Rather, the contractor should supply all of that on their own.
Also keep in mind that in most cases, you can fire an employee at any time, for almost any reason (provided it isn’t discriminatory). But with contractors, your ability to fire them depends on the language in your contractor agreement.
2. Tax Factors
If you hire an employee, then it is critical that you take all appropriate steps to comply with your tax obligations. You’ll be required to withhold a portion of the employee’s paychecks for federal, state and sometimes local taxes (income, employment, etc.). You must also remit those withholdings to the appropriate government entities throughout the year. It can be very cumbersome to do this, which is why it is often best to have an accountant help you or use an online payroll provider like gusto.com.
Things are much easier when you hire a contractor. This is because the contractor (and not your business) is responsible for paying all of their income and employment taxes. You simply pay the contractor the full value of the contract and that’s about it. If you pay a contractor more than $600 in a single year, then you should create and send an IRS Form 1099 to the IRS and to the contractor to report the payments.
3. Intellectual Property Factors
If the person working for your business is creating anything copyrightable (which is a very broad list of works), then you should consider your IP rights.
For employees, it is pretty simple. You’ll own the copyright to all original works they create within the scope of their employment.
However, for contractors, you won’t. That’s why it is critical to sign written agreements with your contractors that include appropriate copyright assignment language to ensure you capture ownership of the copyright when they create new works for you.
Bonus Tips: Get it right, and in writing!
It’s important to avoid mistakes when classifying your workforce. In the end, it isn’t up to you. If your relationship with the worker looks like an employment relationship, the IRS may classify them as an employee, regardless of what you say. For that reason, it’s often a good idea to get legal and accounting advice before making your first hire.
Also, it’s almost always a good idea to document your relationship with your worker with a written agreement. For employees, it can take the form of an offer letter that both parties sign or a formal employment agreement. You also can use different formats for your contractor agreements, but keep in mind that the rights and responsibilities of the parties in a contractor relationship depend almost entirely on the contract. Accordingly, you should clearly document the scope of work, payment terms, ownership of intellectual property, and more.
This article is general in nature and is not legal advice. You should speak to a licensed attorney about your unique circumstances before relying on this article.
Chris Brown represents startups, freelancers, and small businesses through his law firm, Pixel Law. He also co-founded Contract Canvas, a digital contract platform for creative professionals. You can find him on Twitter @thepixellawyer.
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