Contractors vs Employees: Why Small Business Owners Must Know the Difference

Today on the Atlanta Small Business Show, we’re pleased to be joined in the studio by Andrew Poulos who is the principal of Poulos Accounting and Consulting to help us understand what we need to know about independent contractors and employees. These are two different classifications of labor that small businesses really need to drill down and understand, otherwise, they might face some challenges. 

The last few years have been incredibly challenging, especially with COVID complications for small businesses. So, no business owner wants to be on the IRS radar, meaning their books must always be in order. However, the misclassification of employment type could be the underlying decline of any small business. The law that determines if an individual is indeed an independent contractor, is not black and white. 

This law fluctuates based on interpretation. Therefore, the 20 factors you would look into are divided into three main groups with several subcategories. These main groups are behavioral control, financial control, and the relationship of the party. However, the number one way businesses represent behavioral control is by misclassifying the regiments of an employee’s required business hours. 

How to help small businesses stay away from misclassification:

• Businesses need to be reactive before being proactive by planning accordingly. W2 employees have a required set of hours, get paid on payroll from the books, and file specific employment forms at the beginning of employment. 
• Independent contractors get paid under the table for outside jobs. The misconception comes from releasing the artwork to a company that may fall into legal trouble. When working with contractors, evaluating the interaction of business, must result in a contract signed release form. This is to protect the assets of both parties involved. 

Over the years, some businesses didn’t make it, some businesses did okay, and other businesses flourished, depending on the business at that time. Andrew’s PPP program helped several businesses with the content he provided.

Poulos mentions “there are two sets, there are fact patterns that determine if a worker is an employee, a W2 employee where taxes are being withheld and you issue them a W2 year-end or if they’re a subcontractor. Unfortunately, so many small businesses get it wrong. A lot of people just think it’s a handshake deal, which you and I agree to. But there are actual laws that determine if someone is indeed an independent contractor”. 

Treating contractors this way could open the government to challenge these positions or they could go back and reclassify them. Either way, the government’s involvement could get very messy for all parties involved.