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Ask The Experts: Employee or Independent Contractor
Q: If I want to hire employees to work about one hour per week, mostly individuals with disabilities, is it better to pay them as an employee or a contract worker? Is there a minimum someone must make for employee taxes to be paid and taken out (including Social Security and Medicare)? I know that they would need to earn at least $600 to be issued a 1099. If those individuals are working as employees, will the business be required to carry workers compensation insurance even if they’re part time?
A: The key to your question is that the classification of a new worker is not a matter of choice and is not determined by the gross amounts paid to the worker. A new worker is either an employee or an independent contractor. The key factor in making this determination is control: who controls the work product? If you are in charge, and you tell the worker when to come to work, what to do at work, how to do the work, and you provide the tools, computers, etc. to do the work, then you most likely control the work product and therefore the worker is an employee.
If on the other hand, you only control the end result, meaning that the worker provides their own tools, decides how to do the work, where and when to do the work, and most likely has other clients besides you, then they are most likely an independent contractor. So, you can’t just choose which classification you want based on the ease of reporting. Instead, the underlying facts and circumstances that indicate classification thus dictate the reporting requirements.
If the new worker is an employee, then taxes must be withheld. There is no minimum based on the number of hours worked per week. You must verify employment eligibility, report the new hire to your state, and withhold FICA and Medicare taxes even if they only work an hour or two per week. If the new worker is an independent contractor, you must report payments you make for services if you pay that worker at least $600 per year, as you know.
As for workers comp insurance, that will depend on a number of factors including your particular industry, the job that the worker is undertaking, and their relationship to you. The fact that the worker is part time or just working one or two hours per week would not preempt the requirement without some other factor. The best advice would be to contact your state directly to review the requirements for your specific industry.
Keith Hall, NASE Tax Expert
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