What’s The Difference Between an Employee and a Contractor?
An employee is someone who works for your business, and you pay them payroll and you pay payroll taxes on that money – about 10% employer payroll taxes on each employee. If you were to pay an employee a thousand dollars a month, you’re going to end up paying an extra hundred dollars a month in employer payroll taxes. You are also going to deduct the employee portion of the taxes from their paycheck, and you’re going to have to pay that to the IRS, so you want to make sure your records are really good so you know what to pay the IRS and any state agencies.
A contractor is someone whom you hire who is not an employee and who generally does something different than what your company produces, especially in California with its new laws.
If you had a window-washing company and you hired a window washer, you would want them to be an employee. If you have a window washing company and you hired someone to do marketing a few hours a week, that could be a contractor. You are not going to direct their schedule, and you are not going to tell them how to do their job. They are going to come in as an outside service or an outside business and figure out what you need for marketing and then deliver it on a schedule that you both agree with, but you are not telling them what to do or when.
When you pay a contractor, you are not paying any taxes on top of what you pay them. If you are paying a contractor a thousand dollars a month, you pay them a straight thousand dollars a month. At the end of the year, you would give them a 1099 reporting exactly what you paid them for your tax records and their tax records.
Don’t forget, 1099s are due by Jan 31st! Let us know if you need any help filing them.
Maya Weinreb | Founder & CEO