Freelancer vs. Employee: What You Need to Know
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Freelancer vs. Employee: What You Need to Know

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Running a business takes a lot of work and you often find yourself working extremely long hours every single week. Eventually you’ll get to a point where you need some help. However, that doesn’t mean you have to get a full time employee – it may be a better idea to hire a contractor or freelancer.

What’s the difference you say? If you’re not sure, you could run into trouble. That’s because the government is cracking down on business owners who are hiring freelancers and treating them like employees (and vice versa). So before you put out that first ad, let’s take a look at the difference between the two and how you can get into trouble if you aren’t careful.

Freelancer vs. Employee: What You Need to Know

Freelancer vs. Employee

The reason the IRS is so adamant about not using a freelancer as an employee or the other way around is because of taxes. Employees and freelancers are not only paid differently but deal with taxes in totally different ways. If you confuse the two, you’re going to end up taking money out of the government’s pocket.

There are several ways to tell if what you have is an employee rather than a freelancer. First, where do they work? Do they come in day after day to your office? If so, you may have an employee, as freelancers technically work in their own environment.

But that’s not the only feature. When hiring a freelancer for a job, you should always get a contract. Every single job they do requires a new contract. If not, they could be confused for an employee. Also, make sure you pay them for every job rather than a weekly or monthly basis.

Lastly, freelancers should require no training to do their work. You hire them and they start right away. They should also have a name for their business or at least operate under their name. Otherwise the IRS may confuse the freelancer as an employee.

Why It’s Important

As mentioned above, taxes are what this is all about. Employees and freelancers deal with their taxes in totally different ways. And while you may have accidentally confused the two, it could still land you in the same trouble as if you were doing it on purpose.

A freelancer does 99% of the work when it comes to their taxes. They have to pay quarterly estimated taxes, file their own taxes in April, and keep their own books. They receive a 1099-MISC tax form from each client in January or early February. Employees, on the other hand, get most of the work done by you as a business owner. You send their information into the IRS, you pay part of their tax burden, and send them a W-2 tax form helping them figure out their tax obligation for April.

Of course there is also the matter of benefits like health care and the like. A freelancer has to pay for their own health care and other benefits while an employee may be eligible for everything you offer. If you’re treating a freelancer like an employee but denying them regular benefits, you could even get sued. Make sure you’re following the rules!

This guest post is brought to you by Outright, the simplest way to manage your small business finances for a less taxing tax time. Sign up today!

photo credit: Alan Cleaver via photopin cc

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One Response to Freelancer vs. Employee: What You Need to Know

  1. Bastiaan Reinink says:

    There is much more to this than just taxes! How much control do you want, how well do you deal with uncertainty, would you like to scale up at any point in the future? Think through all the dimensions before making a choice.

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