Small business owners—make sure you are not calling workers independent contractors when, under Ohio Law, they are actually employees. If you get this wrong, it can be a costly mistake.
To be sure, hiring an independent contractor has benefits. For one, you do not have to pay payroll taxes. Additionally, independent contractors are not entitled to receive unemployment compensation or worker’s compensation.
However, if you treat a worker as an independent contractor and they should have been classified as an employee, you could get hit with stiff penalties (i.e. the payment of the back taxes you failed to pay, plus interest, AND a penalty for failing to issue a W-2 to your worker.)
To break it down a little further, here are the 10 main differences between 1099 contractors and W2 employees:
- Independent contractors are generally business owners themselves. They may be sole proprietors who have built their business around providing a specialized service to many clients, but they still own their own business. Whereas, employees generally work primarily for you. As a business owner, you pay close attention to the amount of hours an independent contractor works for you.
- Independent contractors have specialized expertise. They know how to do the job requested of them and they do it the way they see fit. As a client, you are not responsible for training them or telling them how to do the job. In other words, independent contractors control the methods, processes, and manner in which they complete the job. However, with employees, you generally exert control over these things. As a business owner, pay attention to the amount of control you are asserting over how the job gets done.
- Independent contractors work with many clients. Even if they have a long-term contract with you, an independent contractor is allowed to take on additional work for other clients. It is for this reason that most independent contractors will not sign non-compete agreements as they curtail their business activities.
- Independent contractors work on specific tasks. This is unlike a traditional employee whose job may encompass a wide variety of duties and tasks.
- Independent contractors submit invoices for services rendered. They do not receive a traditional salary or benefits like employees.
- Independent contractors determine their own hours. As a client, you have very little say in their schedule. You can request that they be available for meetings and other activities, but in general, you cannot dictate when they work. This is not typically the case with an employee, so pay attention to whether you are setting your workers schedule.
- Independent contractors work without oversight. As the client, you are, of course, able to view their work and track their progress, but they are not expected to fit in a corporate structure and there is no expectation for them to work on your premises unless it is integral to their work.
- Independent contractors provide their own tools. For example, a graphic design would use their own computer and pay for their own software. There are certain exceptions, such as when they must work on equipment owned by your company or it is not reasonable for them to own a specific tool.
- Independent contractors pay their own taxes. Instead of providing a W4 when hired and receiving a W2 each year, an independent contract provides a W9 form at the commencement of their contract and receives a 1099 each year. You will often hear workers referred to by their status, either “W2” or “1099”. Employees receive a W2.
- Independent contractors may partner with others. They may have their own employees and subcontractors and may use them at their own discretion.
With this in mind, if you seek to hire an independent contractor, it is very important to make sure your worker actually qualifies as an independent contractor and isn’t actually an employee. The distinction is an important one because employers are not required to pay Social Security (FICA), Medicare, Federal Income Taxes and Unemployment Insurance Taxes, to workers classified as independent contractors. If the Ohio Department of Job and Family Services (ODJFS) believes you’ve mischaracterized employees as independent contractors, they may conduct an audit of your small business. If ODJFS believes you have employer/employee relationship rather than the relationship of client/ independent contractor, you may owe thousands of dollars in back taxes.
As a business owner, it can be tempting to hire someone as a contractor instead of an employee because you don’t have to handle the burden of withholding taxes, paying ODJFS, paying payroll taxes, etc., but the potential fines and attorney fees you might pay if you’re wrong definitely outweigh the benefits!
Whether you’ve determined they’re an independent contractor and need a proper contract, or an employee and need offer letters, employment agreements, employee handbooks, etc., work with your attorney to ensure you have the correct legal documentation!
