June 25, 2013

Freelancer vs. Employee: What You Need to Know

This guest post is brought to you by Outright.com, the alternative to Mint for business and the easiest way to manage your small business finances online!

Sometimes you just need a little help with your business so you set out to hire a freelancer or contractor for a job or two. It helps you get caught up without having to hire an employee who may run out of work to do. They’re great for a quick job and then they’re headed off to find more work elsewhere.

Hiring contractors is becoming even more commonplace in the small business world. While hiring is slowly climbing after the recession, hiring freelancers in the meantime has helped many a business grow. The freelancers also enjoy the work, especially if it’s continued throughout the year.

But therein lies the problem. Just when does this freelancer cross over from being a contractor into being a full time employee? While the line seems obvious, many business owners have gotten into trouble recently for crossing that line.

The IRS is Mad

Hiring a freelancer who actually acts like an employee may not seem like a huge deal, but to the IRS it’s a tremendous problem. It’s not just semantics; it can affect benefits, status, and of course, taxes. Since the way freelancers and employees file taxes is totally different, it could mean you and the freelancer aren’t giving the IRS their fair share.

It doesn’t have to be on purpose, and many of these business owners who are getting into trouble likely had no idea they were creating a scandal. But it’s a problem nonetheless, and the IRS has been cracking down on it lately. If you’re not careful, your business could be next on the chopping block and face big fines.

So how do you know if you’re an offender? There are several criteria that separate freelancer and employee, so let’s take a look.

Freelancer or Employee?

Occasionally you work with a freelancer you like so much you want them to return. Week after week, month after month they send you written works or graphical content or what have you. Eventually you switch from paying them per job to a weekly or monthly basis.

Bam, you’ve just switched them to being an employee without even knowing it. Freelancers must be paid by the job every time. They can itemize jobs on the invoice so you pay all at once, but it’s still listed per job. Otherwise they’re an employee and you have to hire them officially.

Another common mistake small business owners make is not getting a contract with the freelancer. Even if you work for years with a certain person you should still get a contract every time. If there’s no proof they worked per job for you and knew what the conditions were the IRS could raise a fuss.

The IRS also considers freelancers to be “immediate” workers, which means they require no training. If you have to bring them in to train them, they’re likely going to be considered an employee. Also, contractors typically work outside of your office, so if you have them regularly come in and work at your desks you may want to change that.

Lastly, check to see if the freelancer has their own business set up. They may not have a fancy 50th floor corner office but they should have business cards or at least a name like “Bob Bobberson’s Freelance Writing & Tackle.” If not, combined with the other stuff, the IRS could think you’ve hired them full-time.

Have you ever run into this issue?

1 comment:

Rozy Lass said...

All good things to know. Thanks for sharing.