Q: I am a photographer paying studio assistants and a studio manager by the hour as independent contractors, as their responsibilities are not regular, how would you recommend I classify those payments, and under what umbrella category since it’s not a payroll expense (or is it?).
Calling someone a contractor when they should be an employee can get you big penalties and fines – but if they don’t have to be on the payroll, it is cheaper to pay them as a contractor.
How do you know what is right?
The main determining factor of the status of a worker is the amount of control the employer has. A person who is given instructions about when, where and/or how to work is probably an employee. An independent contractor generally chooses her own method for performing work and receives no training, uses her own tools and is only responsible for producing a *result* (like a finished website or a retouched photo).
You should also be aware that even if the person does qualify to be an independent contractor, you may still have to cover them on your Workers Compensation insurance if they don’t have their own coverage.
And, always have a contractor fill out the W9 form *before* you pay them, so you can issue a 1099 form at the end of the year.
“When determining whether an individual is an employee or an independent contractor, the relationship of the worker and the Employer must be examined.
Within the working relationship, the employer must look at 1) behavioral control, 2) financial control, and 3) the actual relationship between the two.”
www.irs.gov
1) Behavioral Control – do you as the employer have the right to decide:
- When and where the work is done
- What tools or equipment to use
- Where to purchase supplies and services for the project/job
- Who will do what tasks
- Who will provide training, instructions or direction
2) Financial Control – do you as the employer have the right to decide:
- The extent to which the worker has unreimbursed expenses
- The extent of the worker’s investment and whether they can realize a profit or loss from the work
- The extent to which the worker does the same work for others
3) Relationship – do you as the employer have the right to decide:
- What contracts are prepared to describe the working relationships of the parties
- If you will provide benefits like insurance, paid time off, etc
- The permanency of the employment relationship
If most of your answers to these questions show control on the part of you, the Employer, then it is likely the worker is an employee and should be on the payroll.
It isn’t enough to just categorize the expense as “payroll” in your accounting software, you would need to set up with a payroll service to have taxes withheld and paid, as well as getting disability, unemployment and workers comp insurance. These additional costs can add 10% – 20% on top of the cost of the wages. I recommend Gusto payroll (we use it here at Moxie).
If you are still unsure, contact your tax accountant or the Department of Labor.
Want help setting up payroll and making sure it is all categorized correctly? Schedule a call to see how we can help!