From Forbes, Kelly Phillips Erb reviews the standard for and differences between classifying a worker as as an employee or independent contractor. She discusses the classification in terms of the difficulty for a small business. She writes:
An employer-employee relationship is governed by state and federal laws. As the employer, you may be required, in addition to withholding and remitting payroll taxes, to provide health care for employees. Depending on the level of perks offered at the company, an employer may have to extend retirement packages, stock option plans, gym memberships and other benefits to employees.
In contrast, an independent contractor is responsible for paying Self-Employment Tax (SE) in addition to income tax. An employer does not withhold any payroll taxes, including Social Security and Medicare taxes, or pay the employer portion of those taxes for an independent contractor. An employer is not responsible for providing paid benefits and tax-favored opportunities like health care insurance and retirement plans for an independent contractor. An employer is not required to offer stock options or other incentive plans to an independent contractor. And when an independent contractor leaves – for whatever reason – there is generally no severance or unemployment compensation payable. In short, an independent contractor is, well, independent.
Sounds great for a small business, right?
Maybe. From a financial perspective, it can be easier to pay an independent contractor. It’s a flat check. No withholding. No perks. No benefits. No extra forms to file. And at the end of the tax year, you won’t provide an independent contractor with a form W-2. Rather, you’ll provide an independent contractor with a form 1099-MISC that typically just includes total wages paid.
From a business perspective, however, it might not be as desirable. There is something to be said for loyalty. Employees may remain loyal, while independent contractors often make it clear that that they will go where the next job may be. That can make continuity in a business difficult…
