Business and Commercial Law

Can I avoid payroll tax issues by hiring independent contractors?

The advantages of independent contractors include:

  • Your business can save money, because you won’t have to pay for the independent contractor’s federal payroll taxes, social security, unemployment insurance, workers’ comp health insurance, vacations and sick leave.
  • You also won’t have to rent space and pay for office furniture for the independent contractor
  • An independent contractor can’t sue you for discrimination or being fired
  • You don’t have to train an independent contractor, and they can usually start productive work right away

The disadvantages of independent contractors include:

  • Independent contractors can sue you if they’re injured on the job due to your negligence, because they aren’t covered by workers’ comp
  • If you later find out that someone you thought was an independent contractor is really considered an employee, you may have to pay back taxes and penalties (up to 35 percent
  • Employee Versus Independent Contractor
  • Different governmental agencies use different tests for deciding when someone is an independent contractor versus an employee.

Internal Revenue Service »