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Employee or a Self-Employed Contractor?

Image: Creative Commons License

You know that person that comes in to help you a few hours a week?  That person that’s “not really an employee” but someone you’ve hired as “a contractor”?  Well… think again.  The IRS may not agree with you.  That person may, in fact, be an employee.

What’s the big difference?

Well… for starters… how you pay these workers and withhold taxes from their paycheck is the first impact on your business.  The IRS states, “Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.”  (As an aside, you DO have to provide a contractor with a 1099 annually if he or she has provided more than $600 of service to your business.)

Well… gee… sounds more favorable to have a contractor, doesn’t it?  (Less paperwork and tax expense for me!)

But, hold on one minute… there are more rules…

The IRS wants to make sure that the contractor has complete control over his or her work.  “Control” is the determinant in whether you have an employee or a contractor.  Here are the rules from the IRS:

“In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.  Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”

Plain English Translation for You…

Let me break this down into simpler terms.  (Please remember, I am not a tax accountant and you should speak with a tax professional to get legal advice.)

  1. Behavioral:
    • Do you tell your worker to be at your office at a certain hour?  If so, he or she is likely an employee.
    • Do you tell your worker that he or she has to work from a specific location (your office or home)?  If so, the worker is likely an employee.
    • Do you have specific tasks, responsibilities, methods, and procedures that he or she must follow?  If so, the worker is likely an employee.
    • Or, do you give the worker a job to do and he or she has complete control over how and when to get it done (with the exception of a deadline)?  If so, he or she is likely a contractor.
  2. Financial:

    • Do you provide all the equipment, materials, and supplies for your worker?  If so, he or she is likely an employee.
    • Are you responsible for paying the worker on schedule, or does he or she invoice you periodically?  If you pay the worker on your schedule, then he or she is an employee.  If the worker invoices you upon completion of milestones or deadlines, then he or she is a contractor.
  3. Type of Relationship:

    • Are there benefits in place that look more like an employment benefit?  Chances are, you have an employee.
    • Do you treat the worker like an employee?  If so, he or she is probably an employee.
    • Is the relationship open-ended, or does it have a finite “project completion” date?  If it is open-ended, then he or she is likely an employee.

Be “IN the KNOW”…

The IRS is cracking down on small businesses these days.  (Think about it: the country needs the income!)  Be sure to watch yourself and do things legally or you could be at the other end of a very ugly audit.

Any thoughts or questions about hiring employees or contractors?

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August 25, 2010 - 8:51 am

Charlene @ Sweetchic - What a great post! I am struggling with this right now because my contractor crosses into both territories. Looks like I need to call my accountant…

August 25, 2010 - 10:17 am

Heather at Outstanding Occasions - Great post! A lot of planners need to be reading this. I hear about lots of planners struggling with this topic and many are not calling them employees when they clearly are.

August 26, 2010 - 5:42 am

Tax Changes that Will Impact Your Wedding Business » Sage Wedding Pros - [...] Employee or a Self-Employed Contractor? [...]

September 2, 2010 - 7:49 am

When In Doubt, Talk to a Professional » Sage Wedding Pros - [...] week, when we did our post discussing the IRS rulings for contracted workers vs. employees there were a lot of questions and comments and ideas and thoughts and “what ifs”.  My [...]

August 22, 2011 - 10:20 am

DeVonda - I’m so glad I read this post. It’s an issue that I’ve run across. I consider my Day-of Assistants as contractors. I just pay them a flat fee for the service for that day; nothing more nothing less. When I was setting up my business I went back in forth on what to consider them. When I decided against paying them hourly I no longer wanted to consider them actual employees.
I’ll definitely have to do more research now.

August 30, 2011 - 10:35 am

Margaret Howard - Hello Michelle,
I am just starting my business in Ohio. All my previous weddings were in Texas. My business is very small and truly don’t expect to grow my it very large. I have a lady that will be helping me occasionally at weddings the day-of. Wouldn’t she just be a contractor? Would appreciate your answer.
Thanks! Margaret Howard

August 31, 2011 - 6:46 am

Michelle Loretat - Hi Margaret, I recommend that you talk to your tax accountant on the best way to classify this helper. Chances are that she is a contractor. A tax accountant (CPA) will ensure that you’ve contracted with her in a way that is most favorable in the eyes of the IRS.

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