Contractor vs Employee: The misclassification Risk
Hiring help? Or getting hired? The IRS cares deeply about the difference.
The Gig Economy is booming, but the line between "Freelancer" and "Employee" is getting thicker. Governments are cracking down on "Misclassification" because they want their payroll taxes.
The Control Test
The IRS and Department of Labor generally use a "Control" test.
You are likely an Employee if:
- The company tells you when to work.
- The company provides the tools (laptop, software).
- The company trains you on how to do the work.
You are likely a Contractor if:
- You set your own hours.
- You use your own equipment.
- You are paid by the project, not by the hour.
The Risk for Startups
If you hire someone as a contractor to save on taxes/insurance, but treat them like an employee, you can be audited. You will owe back-taxes, unpaid overtime, and massive penalties.
The Risk for Freelancers
If you are a contractor, you have no unemployment insurance, no workers comp, and no health benefits. Make sure your hourly rate is at least 30-50% higher than an equivalent salary to cover these "self-employment taxes."
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