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Employees or Contractors - Which is Right for Your Growing Business?

Congrats your business is growing!!! But now you need to bring on help because you can no longer manage it all on your own.

Deciding how to bring on people to assist you is an important decision that has serious legal and financial implications. There are two ways you can add help to your business. One is to hire an employee and the other is to retain the individual as an independent contractor.


An employee is an individual hired by your business for a specific role. You are responsible for withholding on behalf of the employee state and federal taxes, Social Security and Medicare and paying state and federal taxes. Additionally, you are required to pay into an unemployment fund on behalf of the employee. Employees generally receives payment as an hourly rate or as a salary.

They are usually entitled to certain benefits and protections. The method of how the work is performed and the hours that the employee works are controlled by you.

Independent Contractor

On the other hand, an independent contractor is an individual retained for specific role or project. They are generally paid pursuant to the work completed by the contractor. You are not responsible for withholding taxes or paying any taxes on behalf of the contractor. Additionally, contractor is not afforded the same statutory protections that exist to benefit employees like overtime laws and minimum wage requirements. In exchange for not being responsible for paying taxes, you cannot control the method of how the contractor completes the work, what hours the contractor is available and where the work is completed. Additionally, independent contractors tend to be providing services for more than one company at a time.

Why Does it Matter?

The biggest concern for business owners is properly classifying the individuals you bring in to perform work for you. A common mistake that business owners make is that they misclassify someone as an independent contractor when in fact the individual operates more as an employee than an independent contractor. It requires more effort than just issuing a 1099 to someone to make them an independent contractor. If you improperly classify an individual as an independent contractor instead of an employee, you could be responsible for back taxes and that could potentially be damaging to your business.

 a silhouette of a man  drawn on pieces of wooden blocks. In the middle is a magnifying glass

How Do You Decide?

Generally, the IRS has its own set of determining questions that would help a business owner determine whether an individual is a true independent contractor or an employee. According to the IRS, “acts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

  3. Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”

These categories are measured against the whole relationship of the individual and the company.

In addition to the questions provided by the IRS, each state may have its own requirements that an individual must meet in order to be classified as an independent contractor and each state will have different standards. In Wisconsin, there are two tests that are used to measure whether someone is truly an independent contractor or employee.

One test is under the Worker’s Compensation Act, which requires that an independent contractor must meet all nine requirements in order to be properly classified as an independent contractor.

  1. Maintains a separate business with his or her own office, equipment, materials and other facilities.

  2. Holds or has applied for a federal employer identification number with the federal internal revenue service or has filed business or self-employment income tax returns with the federal internal revenue service based on that work or service in the previous year.

  3. Operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the services or work.

  4. Incurs the main expenses related to the service or work that he or she performs under contract.

  5. Is responsible for the satisfactory completion of work or services that he or she contracts to perform and is liable for a failure to complete the work or service.

  6. Receives compensation for work or service performed under a contract on a commission or per job or competitive bid basis and not on any other basis.

  7. May realize a profit or suffer a loss under contracts to perform work or service.

  8. Has continuing or recurring business liabilities or obligations.

  9. The success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures.

In addition to the Worker’s Compensation Act test, Wisconsin also utilizes a test under the Wisconsin Unemployment Act, which states that an individual must meet at least six of the factors below in order to be classified as a independent contractor.

  1. Advertises or otherwise affirmatively holds himself or herself out as being in business.

  2. Maintains his or her own office or performs most of the services in a facility or location chosen by the individual and uses their own equipment or materials in performing the services.

  3. Operates under multiple contracts with one or more employing units to perform specific services.

  4. Incurs the main expenses related to the services that they perform under contract.

  5. Obligated to redo unsatisfactory work for no additional compensation or is subject to a monetary penalty for unsatisfactory work.

  6. The services performed by the individual do not directly relate to the employing unit retaining the services.

  7. May realize a profit or suffer a loss under contracts to perform such services.

  8. Has recurring business liabilities or obligations.

  9. Is not economically dependent upon a particular employing unit with respect to the services being performed.

While the factors under the Unemployment Act do not require strict compliance, Wisconsin courts have found that if an individual fails to meet any of the requirements under Wisconsin’s Worker Compensation Act, the individual is not considered an independent contractor.

Protecting Your Business

If you are thinking about adding someone to your business, whether they are employees or contractors, take some time to think about what role this individual will be filing in your business and what the proper classification is for this individual.

If you decide to pursue retaining the individual as an independent contractor, it is good practice to put the nature of your relationship into an agreement. The agreement would help to ensure that you are meeting the requirements of the Wisconsin tests and the IRS’ control test. It is no longer enough to just state that someone is an independent contractor.

If you are still unsure, we are here to help. You can schedule a consultation with us to talk more about which classification is best for your business and what steps you need to take to add that person to your business as either an employee or independent contractor.

Congrats on taking this important step in growing your business!

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