Independent Contractor or Employee? Answering 2 Simple Questions Can Save Your Business from Financial Ruin


When you started your business I bet you never contemplated all the different things you would have to learn in order to make your business a success.  Even if you started with just one person out of the spare bedroom in your house I am sure you quickly realized you had a need for departments.  O’Connor Insurance did in fact start out as a one-man operation out of the spare bedroom in our house.  Within weeks we realized the need to have some accounting processes put in place for handling of business expenses, receipts, reimbursement etc…

As we contemplated hiring our first employee I dug into researching everything Human Resources (HR).  Luckily I have a degree in business administration so I was exposed in college to Human Resources, Accounting, Marketing, and Management.  It gave me just enough knowledge to realize how little I actually knew about managing employees and the law.

Daily at O’Connor Insurance we have conversations with our business owners regarding the status of workers.  Is that worker an employee or independent contractor?  Just because you decide to 1099 someone doing work for you does not make that person an independent contractor.  In North Carolina this issue has been gaining attention as contractors were misclassified as independent contractors and denied Workers Compensation benefits.  I have read countless articles about how North Carolina is cracking down on this very topic.  In the Charlotte Observer Saturday is another article about a case that once settled will bring some clarification.  Click here to read the article.

In doing my research I went straight to the IRS for clarification because ultimately if you make a mistake on this one you will have to pay the price via taxes.  The IRS suggests you determine the business relationship that exists before you decide on how you will pay someone.  Ask yourself 2 simple questions:

  1. Do you control the way the work is done?
  2. Do you control when the work is done?

If you answered yes to either of those very important questions, then the business relationship is one of an employee.  After you have determined the person to be an employee then you must treat that person as such.  Check out the IRS’s website for more information.

Paying taxes is not the only issue at hand.  You also must carry and cover employees on worker’s compensation insurance, provide benefits in the same manner you do to employees and follow the state laws on overtime pay.  If you are trying to cut corners by paying someone as a 1099 independent contractor and you haven’t taken the time to determine what the business relationship really is you could cost your business thousands of dollars.  Bottom line is you have to get this of one right you simply can not afford to make a mistake.

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