At Cyron & Company, we help business owners throughout Chester County understand the differences between an employee and a contractor. We make sure that the people you have working for you are classified correctly. With over 20 years of experience helping businesses grow and have a strong financial foundation, you can count on us to help you do things right from the very beginning. We’ll walk you through all the options so you can avoid costly mistakes and focus on running your business with confidence instead.
Call (484) 770-8796 to Schedule a Free Consultation
Over the years, we have provided consultation support to many businesses. Our wide array of services helps businesses grow. Part of business growth is bringing new workers on board. If you’re a business owner trying to figure out whether to hire someone as an employee or bring them on as a contractor, you’re not alone. We get this question all the time at Cyron & Company. There are key differences and a few similarities between the two, and getting it right matters. So, we have created a simple breakdown to help you compare and some key points to consider when you’re looking at the differences between an employee and a contractor.
The differences between an employee and a contractor: What you need to know
What’s Similar?
- Both provide services for your business- At the end of the day, both employees and contractors help you get work done.
- You agree on the work being performed- Whether it’s a job description or a contract, you lay out what’s expected up front.
- They’re both paid by your business- You’re compensating them for the value they provide, just through different methods.
What’s Different?
- Control and independence– One of the differences between an employee and a contractor is that employees usually follow your schedule, use your tools, and work under your direction. Contractors work more independently and often decide how and when to do the job.
- Taxes and withholding– You’re required to withhold income taxes and pay Social Security and Medicare taxes for employees. Contractors handle their own tax obligations.
- Benefits– Employees might receive benefits like health insurance, paid time off, and retirement contributions. Contractors generally aren’t offered these extras.
- Long-term vs. project-based- Employees are typically long-term team members. Contractors are often hired for short-term or specialized projects.
- Legal obligations- Employees are covered by laws related to minimum wage, overtime, and unemployment insurance. Contractors are not.
5 Financial implications of each classification
Not knowing the differences between an employee and a contractor and getting the classification wrong can be expensive. Therefore, it’s important to understand how each option affects your business financially. Let’s dive into each factor so you can have more clarity and confidence when it comes to making the choice.
1. Payroll taxes
You must withhold and match payroll taxes for employees. For contractors, you don’t withhold anything. They are responsible for their own taxes.
2. Workers’ compensation and unemployment insurance
You’re required to provide this coverage for employees. Contractors aren’t covered by your workers’ comp or unemployment insurance policies.
3. Benefits costs
Offering health insurance, paid leave, or retirement contributions can add up with employees. Contractors typically aren’t offered these, which may reduce costs.
4. Administrative burden
Managing payroll, tax filings, and HR policies takes more time and effort with employees. Contractor relationships are often simpler from an admin standpoint.
5. Risk of misclassification
If you treat contractors like employees but classify them incorrectly, the IRS or your state may hit you with penalties, back taxes, and interest. This is one of the most important reasons to get it right, and where we come in to help you really know the differences between an employee and a contractor..
A quick overview of IRS guidelines
If you’re getting clearer on the differences between an employee and a contractor, but you’re still unsure whether someone should be classified as an employee or a contractor, you’re not alone. It’s a common area of confusion for business owners. The IRS looks at a few key factors to help determine the right classification. Here are the three main things the IRS considers:
- Behavioral Control- Do you tell the worker when, where, and how to do the job? If you’re giving specific instructions, training, or closely supervising their work, the IRS may see them as an employee.
- Financial Control- Do you control how the person is paid, whether they’re reimbursed for expenses, or whether they can work for other clients? Contractors usually have more control over how they manage their own business finances and take on multiple clients.
- Type of Relationship- Are you offering benefits like health insurance, paid time off, or retirement plans? Is the relationship expected to continue indefinitely? These are signs the worker might be an employee, not a contractor.
The rules aren’t always cut and dry, and the details matter. That’s why we always recommend talking with a professional before making the call. At Cyron & Company, we help businesses in Chester County look at the full picture so you can make the right decision and avoid any IRS issues down the road.
At Cyron & Company, we help you decide on the best fit for your unique business.
We take the time to look at your business goals, the type of work being done, and your long-term plans. From there, we walk you through the pros and cons of each option, explain the tax and legal responsibilities involved, and help you make a clear, confident decision. Whether you’re hiring your first team member or expanding your staff, we’re here to guide you every step of the way and make sure you’re set up the right way from the start. Contact us today to schedule a free consultation so you can move forward in expanding your team.
Read this 5-star review from small-business owner Tila, which shows our dedication to our clients
“I am grateful to have Michele Cyron and her skilled team taking care of my small business needs. They have been instrumental in getting me set up with QuickBooks online, payroll and book keeping so that I can focus on my own business. They are friendly, knowledgeable and enjoyable to work with.”
Call (484) 770-8796 to Schedule a Free Consultation
Cyron & Company is a CPA firm based in Kennett Square, PA, offering comprehensive accounting and tax services for small to mid-sized businesses and individuals. Our services include outsourced accounting and CFO solutions, tax planning and preparation, financial statement reviews, business startup consulting, and QuickBooks Online training. The firm emphasizes using cutting-edge digital tools to simplify financial management, helping clients make informed decisions. With over 20 years of experience, we provide customized financial guidance to help businesses succeed.
