Workers vs. Independent Contractors: Which Is Better? Hiring Has Tax Consequences

Learn how workers and contractors effect your taxes.

For small company owners, deciding whether to hire employees or contractors is a critical issue that affects not just working relationships but also taxes. Although it’s important to base your hiring choice on the sort of working relationship you want, you should also be mindful of your tax obligations in any instance.

To begin, it’s critical to grasp the distinction between an employee and an independent contractor. The degree of influence an employer has determines the difference. Although both workers and independent contractors provide services at the request of the employer, only employees have the ability to direct how the service is delivered. Independent contractors provide services in whichever way they deem suitable. Independent Contractors usually demand greater costs for specialized services, utilize their own supplies, and control their own work schedule.

You should be aware of the following distinctions in tax treatment between employees and independent contractors:

Employees should:

You are required to withhold both state and federal income taxes.
You must deduct Social Security taxes.
You must deduct Medicare tax.
Unemployment tax must be paid on earnings.
Each employee must be given a W-2 form.

For self-employed individuals:

Employers do not need to be concerned about the aforementioned tax difficulties for workers. Independent contractors manage social security, medicare, and other taxes.
Employers must provide a W-9 form for the independent contractor to complete.
To record certain kinds of payments made to independent contractors, you may be required to submit information returns (form 1099-MISC). In general, every payment in excess of $600 will need the filing of a 1099-MISC form.

If you misclassify workers as independent contractors on your tax return, you will be responsible for paying employment taxes for that worker, so double-check any Employment Agreements and Independent Contractor Agreements to ensure your working relationship is correct.