Paying an Employee or Contract Laborer: Understanding the Differences

As a business owner with a growing business, you quickly realize that you can't possibly do everything that needs to be done. As a result you may want to hire some help. There are two ways to compensate someone who does work for you: either as an employee or as an independent contractor.

So what is the difference between the two? First, if you choose to higher someone as an employee, you have to pay half of their Social Security and Medicare tax, pay unemployment insurance on them, file quarterlies, and send them a W-2 at the end of the year. This can be costly and time consuming for a business owner who is striving to build a business.

As a result, a lot of business owners choose to pay people as independent contractors. This eliminates having to pay half of the Social Security and Medicare tax, the unemployment insurance, and filing quarterly taxes. The business owner still needs to generate a 1099 form at the end of the year and give that to the independent contractor, but the costs are considerably less.

The IRS watches very closely how you choose to compensate people for the work they do for you. The IRS has come up with specific criteria for determining whether a person is an employee or independent contractor. If you don't follow the specific criteria then a worker can be considered an employee and you could find yourself paying back Social Security and Medicare tax and unemployment insurance. With that can bring large penalties and interest.

So how do you decide which is the best way to compensate your workers? That is entirely up to you, but the most important thing to do is to make sure you are following the rules for paying employees and independent contractors correctly. Click the links below for an instructional CD set that will teach you everything you need to know to make sure you are following these rules.

Matthew P. Anderson is the Web Administrator for Soulence Tax and Accounting.

Go to http://www.avoidbeingaudited.com to make sure you are paying your employees and independent contractors correctly. And to learn more about how to save thousands on your taxes without worrying about being audited.

To learn how to find financial peace of mind using the services Soulence Tax and Accounting provides, visit their website: http://soulence.com/