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Most successful small business owners will, at some point, need the help of additional workers. Deciding whether to hire an employee or to engage the services of an independent contractor is the first step. The specific business needs will play a large part in dictating which option is best.
A business owner who has an ongoing need for help, such as a salesperson, will probably choose to hire an employee. On the other hand, a business owner who needs his business premises painted would probably hire an independent contractor. In other circumstances, the right decision can be less clear.
A business owner's responsibilities vary greatly depending on whether a worker is an employee or an independent contractor. Most important are the rules relating to employment verification and payroll taxes. A business owner has several responsibilities with respect to employees that don't apply to independent contractors.
In contrast, a business owner who hires an independent contractor has no responsibility to verify that the person is eligible to work in the U.S. Additionally, the contractor, and not the business owner, is responsible for the payment of all employment taxes. For this reason, many small business owners would prefer, if possible, to deal only with independent contractors to avoid the bookkeeping and other compliance activities required when the business has employees.
The IRS recently offered some advice on the employer versus independent contractor issue. As you might expect, the IRS has the final say on the matter. Complying with the eligibility verification requirements is a one-time event for each employee, but withholding, accounting for, and remitting taxes to the IRS is ongoing.
Here are seven things every small business owner should know about hiring people as employees or as independent contractors.