One question I get from quite a few start-up clients of my business start-up law practice, is whether they should hire employees or independent contractors. After a brief discusion, those clients usually will opt to classify new workers as independent contractors instead of employees. This is mainly a cost saving decision. The costs attributable to hiring employees can be substantial, including workers’ compensation, unemployment insurance tax, social security tax and withholding and local payroll taxes.
A good start to identifying workers as independnt contractors vs employees is to have a properly drafted agreement signed in writing by the company and the worker, although simply identifying a worker as an independent contractor, even in a signed agreement, does not mean that the law will recognize the worker as such. The law will look to factors such as the degree of control and direction the company has over the worker. Misclassification of a worker can lead to obligations to pay back taxes, penalties, and interest payments.
If you are a start-up and have questions about how to classify your workers as independent contractors, make sure you seek the legal advice of a good business start-up attorney.