Why Independent Contractors are Gold for Small Business

1.  Tax and Payroll Savings

Compared to employees, independent contractors save small businesses a lot of hassle, taxes, and paperwork.  A small business does not have to do payroll for independent contractors; it does not have to pay social security and Medicare taxes, unemployment taxes or provide workers compensation and disability insurance.  These taxes and insurances really add up, as well as the cost for preparing all necessary paperwork and complying with the tax and reporting requirements.

2.  Limited Liability Exposure

A small business may not automatically be responsible for damage caused by an independent contractor, whereas wrongdoing of an employee is often directly imputed to the small business employer, even if the employer had no fault in the wrongdoing of the employee.

In addition, many anti-discrimination and similar laws do not apply to independent contractors, only to employees.

So why would any small business ever hire an employee?  Very simple, the decision whether their "hired help" is an independent contractor or employee is not up to them.  There are numerous legal tests and court cases available to determine whether a worker is an independent contractor or employee.  Very, very generally speaking, the more control the small business has over the worker in terms of hours worked, equipment used, power to terminate, and other aspects of the working relationship, the more likely it is that a worker would be classified as an employee.

To make matters even more complicated, the various state and federal agencies and courts have different tests that may result in different classifications.  In other words, while the IRS may be o.k. with your worker’s status as an independent contractor, New York courts may have a different opinion when having to decide whether a tort was committed by an independent contractor or an employee, i.e. whether the small business should be made liable for the tort without any wrongdoing of its own.

To learn more about the IRS’ ideas about independent contractors/employees, look here.

Independent Contractors explained by the New York State Department of Labor.

**This post is for informational purposes only and does not constitute legal advice**

About Imke Ratschko

Imke Ratschko is a New York Attorney helping small businesses, business owners and entrepreneurs with all things "Small Business Law," such as litigation, contracts, business owner disputes, shareholder and operating agreements, sale or purchase of a business, investors, and starting a business. You can reach her at 212.253.1027.

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