How To Classify Workers As Employees Or Independent Contractors For Your New Corporation

If you are preparing to start a new corporation, there will be many tasks for you to complete. You will need to find real estate, purchase the equipment and goods you need, and hire people to work for you. As you prepare for this, you may wonder whether it would be better to hire employees or independent contractors, and talking to a corporate lawyer about this is a great place to start.

What Is The Main Difference?

When people perform work for your company, you must pay them for the work, and there are two ways to set up relationships for people that perform work. The first is by hiring employees. These are individuals that work directly for you who receive regular paychecks from your company. Independent contractors also can perform work for you, but they do not receive regular paychecks. They work on contracts, and you pay them according to their contracted work and rates. This is the main difference between employees and independent contractors.

What Are The Benefits Of Hiring Independent Contractors?

One of the most significant benefits of hiring independent contractors instead of employees is the money you can save on taxes and benefits. When someone is your employee, you must withhold taxes from their paycheck. In addition, you will have to match certain taxes and pay for them out of your pocket. With employees, you must also provide unemployment insurance compensation, workers' compensation, and other forms of protection. You may also need to offer benefits to your employees, such as healthcare, 401k plans, and other benefits that will cost your business money.

The benefit of having independent contractors is that none of these things exist. You do not have to withhold or pay taxes for these workers. You do not have to give them benefits. You will not have any expenses relating to them, except for the expenses directly stated in the contracts you have with them.

Why Wouldn't You Just Hire All Independent Contractors?

After hearing these differences, it might appear that having independent contractors would be the more cost-effective solution for getting the work done. While this might be the case in certain situations, there are rules relating to this. You cannot just hire people to do work for you full time and call them independent contractors. The law strictly prohibits this, and the IRS has many rules and principles that determine how to classify workers properly.

In order for a person to be considered an independent contractor, certain conditions must exist, including the following:

  • A person must not be on the company's payroll
  • They must typically supply the equipment and materials needed for their job
  • The work is not needed on a full-time, permanent basis

If you are starting a construction corporation, you may be able to classify some of your workers as employees and others as independent contractors. The workers who show up to the office each morning to create bids, run jobsites, and manage budgets would probably be considered employees. The contractors that perform jobs for the building projects, such as the plumbers and electricians, would be considered independent contractors.

Another factor to consider is that many people would not want to work as independent contractors. If they did, they would technically be considered small-business owners. They would have to pay their own taxes directly to the government, and they would not have access to the common types of benefits offered by most corporations.

If you are starting a corporation and want to make sure you set everything up properly and legally, you should hire a corporate lawyer to assist you. For more information, check out websites like