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December 10, 2015

Employee or contractor: Considerations for Small Business Owners

As a start-up or small business owner, you probably struggle with the idea of hiring new employees.  Some small business instead hire contract workers or consultants instead in a effort to save money on taxes, insurance and overhead.  But do be aware that there can be significant penalties if you misclassify employees as contractors.

The IRS code presumes that if you are an officer of the company, you are an employee and subject to federal tax and withholding. If it’s determined that you are named vice president of the company while serving as an independent contractor, you and the company may be penalized for not paying withholding taxes.

You are probably area that independent contractors are not eligible for either unemployment or workers’ compensation benefits. But disputes often occur over worker classification when a person considered an independent contractor is no longer associated with the company and files for unemployment benefits!


  • Facts that provide evidence of the degree of control and independence fall into three categories:
  • Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?


The answers in parenthesis should be your answer if you want to consider them as a contractor or consultant.

  1. Is the consultant required to comply with your instructions as to when, where, and how the work is to be done? (No.)
  2. Did you provide the consultant with training to enable him to perform his job in a particular method or manner? (No.)
  3. Are the services the consultant provides integrated into your business operation? (No.)
  4. Must the services be rendered by the consultant personally? (No.)
  5. Does the consultant have the capability to hire, supervise, or pay assistants to help him in performing the services under contract? (Yes.)
  6. Is the relationship between the consultant and your company a continuing relationship? (No.)
  7. Who sets the hours of work? (The consultant does.)
  8. Is the consultant required to devote his full time to the your company? (No.)
  9. Does the consultant perform the work at your company’s place of business? (No.)
  10. Who directs the order or sequence in which the consultant works? (The consultant does.)
  11. Is the consultant required to provide regular written or oral reports to you? (No.)
  12. What is the method of payment – hourly, commission or by the job? (Fixed price, not-to-exceed, and/or milestone payments are generally standard for independent contractors.)
  13. Do you reimburse the consultant for his business and/or traveling expenses? (No.)
  14. Who furnishes tools and materials used by the consultant in providing services? (The consultant does. This includes workstation, internet access, etc.)
  15. Does the consultant have a significant investment in the facilities he uses to perform his services? (Yes. The focus here is on the word “significant.” Lots of employees have a home computer.)
  16. Can the consultant realize both a profit and a loss from his work? (Yes-the consultant must assume risk based on whether you are satisfied with his work.)
  17. Can the consultant work for a number of firms at the same time? (Yes.)
  18. Does the consultant make his services available to the general public? (Yes. For example, the consultant should have business cards, stationery, invoices, and a business listing in the phone book.)
  19. Is the consultant subject to dismissal for reasons other than nonperformance of contract specifications? (No.)
  20. Can the consultant terminate the relationship without incurring a liability for failure to complete a job? (No. If the consultant works on a project or milestone basis, the consultant must deliver to receive payment for his efforts.)


  • More Business:
    Hiring Consultants: Independent Contractor vs. Employee
  • Under30CEO:
    The Quick, Dirty and Complete Guide to Consultants for Your Business
  • Internal Revenue Service:
    Self Employed or Employed?
  • BizTaxLaw:
    What Should be Included in an Independent Contractor Agreement?
  • The Great Debate: Employee vs Independent Contractor