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Did you know there’s a difference between being a freelancer and an employee of a business? Ok, that’s pretty silly, of course you know that. If you’re like many Americans, you’ve spent time as both at some point during your career. One’s where you sit at home and freak out wondering where your next job will come from and the other involves going to an office and complaining about the boss. (Maybe we exaggerate… a little!)
However, and this may come as a total shock, the government has some pretty strict rules when it comes to what a freelancer is and what an employee is. In fact, there are several criteria someone must meet to be considered a freelancer rather than an employee. If you switch them up, there could be dire consequences from the IRS.
So you don’t get in trouble, read on to find out these criteria are!
Contracts – Did you hire a contractor or freelancer and not sign a contract? Then you may be at risk for unknowingly signing up an employee. Freelancers are considered to be business owners themselves so you must have a contract with them. Yes, many freelancers won’t ask you to sign a contract, but you should insist on getting everything in writing just in case.
No Training – A freelancer should be able to immediately jump into work as soon as the contract is hired. If there is a training period involved, especially if you have to bring them into your office, they’re likely considered an employee. Of course you may have to let them know specifics and quirks of the job they’re doing, but anything extensive could land you in hot water.
Where They Work – Unless the freelancer is fixing something in your office they should not work there. According to the IRS, the freelancer will have their own designated workspace to operate out of, even if it’s a kitchen table. Coming in day after day is what an employee does.
Getting Paid – How often do you pay your freelancers? If it’s anything besides “after the work is done” you may be in for a rude awakening. Employees get paid on a time-based scale; freelancers get paid by the job. This is also why it’s important to get a contract for every single job as there will always be proof you’re doing things the right way.
Business Materials – This one seems a little arbitrary, but a freelancer should be able to prove they own their own business. This could be anything from having a dedicated space or having a business card on hand. If they don’t have anything like this the IRS may think you’re trying to pull a fast one on them.
Taxes – One last difference between an employee and a freelancer is independent contractors do all their own taxes. If you fill out tax info and pay in to the IRS for the person you hired, you likely have an employee on your hands rather than a freelancer.
If you – knowingly or unknowingly – treat an “employee” like a “freelancer” you may be in for some serious tax-time penalties. The IRS is cracking down on small business owners who are taking advantage of the system, so make sure you have all your ducks in a row!