If you are starting your business from the ground up, you will run into this question. The answer is employees. Well, not always, but almost always. Almost no business owner wants to hear this, and they make very impassioned arguments about why this should not be the case. I agree. Life is much easier as a business owner if you don’t need employees. I personally prefer not to use employees. However, don’t delude yourself. If you misclassify employees as Independent Contractors, you can face financial consequences, and if you do it intentionally you can even face punitive damages. The easiest rule of thumb is to be honest with yourself on how much control you want to exert over the employees. If you are going to be requiring them to be somewhere at a specific time, or follow certain procedures right off the bat you probably have an employee. If the person you utilize has complete discretion over how and when to accomplish the task (AND a business license…AND insurance…AND a business name) you may have a legitimate case for Independent Contractors. The specific IRS guidelines (and forms) can be found here http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee but be aware that some states, like California, have even more stringent requirements (and a need for the money that employee tax provides so they are highly motivated to audit you). The time and money you save by using Independent Contractors is far outweighed by the time and money an audit costs and be aware that depending on the circumstances, the State may report you to the IRS – blessing you with further audits for years to come. It’s just not worth it. If you do use Independent Contractors, do yourself a favor, and get a written legal opinion from a practicing lawyer stating they consulted with you and opined that the classification was legitimate. This will not necessarily win your audit, but it will probably get your punitive fines reduced at the least.
