<aside> What’s this about? You can engage a worker as either an employee or an independent contractor. Contractors are typically less costly, but there’s a high risk and penalty for having someone who should be an employee misclassified as an independent contractor.
What do I need to do? Confirm that you want to engage your worker as an contractor. Then, engage them through an independent contractor agreement.
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Regulator guidance
Templates
You can engage a member of staff as either an employee or an independent contractor.
Employees are typically more costly, both in terms of financial cost and administrative burden. But employment is typically more appealing to the prospective hire, and usually includes a package of benefits (e.g. healthcare) in addition to the salary.
There’s a high risk and penalty for having someone who should be an employee misclassified as an independent contractor. So make sure you determine the appropriate engagement type before hiring someone as an employee or independent contractor.
A worker is generally classified as an independent contractor if the payer controls the result of the work but not how the work will be done.
(The “independent” in the independent contractor defines the contractor as a non-employee and independent of the company where they’re doing contracted work.)
| Pros | ✅ Specialized services on a project/as-needed basis without cost of a full-time employee ✅ No need to pay Social Security or Medicare taxes ✅ No need to provide statutory employee benefits ✅ No need to withhold or report taxes on an independent contractor's services | | --- | --- | | Cons | ❌ You must ensure that it’s truly an independent contractor relationship ❌ If hiring overseas, you may have tax obligations to the contractor’s country |
The IRS has clear definitions on what constitutes an independent contractor. Misclassifying a worker as an employee or independent contractor has liabilities to a company, which include the potential loss of eligibility for unemployment protection and malpractice insurance protection.
As an employer, you don’t withhold or report taxes relating to an independent contractor’s services.
An independent contractor:
An independent contractor can be a sole proprietor, a freelancer with an incorporated business, a professional with a Limited Liability Partnership, or a corporation.
Contractors are responsible for:
See Engage an employee.
Once you’ve determined the engagement type for a worker, you’ll need to figure out how to hire them.
You can hire contractors directly, by co-signing an independent contractor agreement.
There doesn’t have to be any further costs to the arrangement. However, if you’re already using a PEO/EOR, you may prefer to hire contractors through that PEO/EOR in order to consolidate all workers — employees and contractors — in a single platform. Platforms will typically charge a fee for this service, on the order of $50 per month.
Instead of employing an international worker, you might consider hiring them as an independent contractor.
You can hire contractors directly, by co-signing an independent contractor agreement.
Before you begin paying them, international contractors should submit a W8-BEN form if they aren’t US citizens. This ensures that neither your organization nor the government withholds tax deductions for the contractor.
There doesn’t have to be any further costs to the arrangement. However, if you’re already using a PEO/EOR, you may prefer to hire contractors through that PEO/EOR in order to consolidate all workers — employees and contractors — in a single platform. Platforms will typically charge a fee for this service, on the order of $50 per month.