Small Business Growing Pains: Independent Contractor or Employee?

by Anne Dorsey

For small business owners, the prospect of growth can be both exciting and confusing. When you find yourself in need of additional help, the thought of paying out your hard-earned money and navigating the tax laws is probably not at the top of your “preferred tasks” lists. It can be too easy to bring in the extra help, pay them for their effort, and get yourself into a sticky financial situation when it comes time to file taxes or if you are audited. 

It can be difficult to determine if you have an independent contractor or an employee and it is one of the most frequent questions business owners ask their accounting professional. Taking the time to determine how a worker should be classified as well as following through with the appropriate documentation can save both you and the worker from financial fallout at tax time next year.

When hiring an individual to do work for their business, many business owners do not understand how to classify the person for state and federal compliance. Many assume (incorrectly) that a person they hire would be considered a contractor if they:

  •  Only perform a specific task for the company.

  •  Only need to work for occasional periods of time.

  •  If they are new and the owner isn’t sure they will stay past a probationary period.

While these characteristics may sometimes be true of a contractor, they are not the only characteristics which determine if a person is a contractor or an employee.


From a business owner’s standpoint, an independent contractor is someone whom is working toward achieving a specific objective as outlined by you, the client. You control the result of the work but not how the work is accomplished. 

For example, if you were to hire a landscaper, the contract might outline how landscaping services will be done, which services will be performed (i.e. mowing, hedge trimming, planting, weed and pest management, debris removal, etc.). You establish a time line or a deadline, and when the work is completed to your satisfaction, the landscaper sends an invoice for payment. 

Once the contract is in place, the landscaper determines how many and which of their employees will be assigned to the job, what tools will be used, and often when during the week and day the job will be performed. 

There are some professions that can easily be identified as independent contractors. If your business hires a doctor, lawyer, general contractor or other skilled professional for a specific project, they will most likely be considered contractors.

Here are some questions to help determine if you are hiring a contractor: Are you hiring for a specific project? Is there a specific time frame associated with the hire? Are you hiring someone who is part of another company? Will the person be submitting an invoice for payment? Will they largely have control over their own schedule?

If you are working with a contractor, they will need them complete form W-9 prior to working and at the end of the year you will need to issue form 1099-MISC if you paid $600 or more for services in a single calendar year.


An employee is someone whose association with your company is much more controlled. As their employer, you dictate their pay, when they arrive at the job site, how long their work day is, what tasks they will be doing throughout the day, when they are allowed breaks, what tools and programs they will use, as well as which company policies and procedures they must adhere to.

If you are a graphic designer, for example, and find that you have too much work to keep up with on your own, you may hire another graphic designer to do some of the work for you. When you hire the new designer, if you tell them that they must be at your office at 8:15, use specific software, which clients and jobs they will handle, and that they get an hour for lunch and requiring a specific mode of dress, you are hiring an employee. 

Here are some questions to help determine if you are hiring an employee: Will the person work a fixed amount of time during the day? Will the person’s work time be scheduled by someone other than themselves? Would the person be required to request vacation or leave time? Is the person required to track their hours or days off and will this affect their pay? Is the person required to adhere to a specific dress code or uniform?

If you are hiring an employee, they will need to complete form W4, NC4 and I-9. Additionally, North Carolina has a reporting system for businesses to report new hires. Employees also have certain rights as outlined by employment law, such as minimum wage and overtime requirements. Company benefits such as health insurance, vacation or sick time would only apply to employees. 

Incorrect Classification

What happens if you don’t classify correctly? Employees are subject to payroll tax withholding (Medicare, Social Security, State and Federal Income taxes). If your business is found to have misclassified employees as contractors, you may be liable for employment taxes and back pay based on minimum wage and overtime rights. 

Trying to determine if you have an independent contractor or employee isn’t always clear. If you are unsure, it’s always best to ask a professional rather than risk misclassifying the person. 

Anne Dorsey is the owner of Clerical Support Services. She is a QuickBooks Platinum Certified Pro-Advisor. For assistance with your payroll, QuickBooks, bookkeeping or other business services contact Clerical Support Services at 252-412-5171 or by emailing

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