Business By The Books with Danielle Hayden How to Know If Your Contractor Should Be an Employee: The 3-Part Test That Could Save You Thousands – Ep. 248
What if misclassifying your team could cost you thousands in back taxes, penalties, and missed benefits? Most business owners don't realize how risky it can be to pay someone as a contractor when they really should be an employee.
In this episode, Danielle Hayden, reformed corporate CFO and CEO of Kickstart Accounting, Inc., simplifies the IRS classification rules into a 3-step framework that helps you confidently decide whether your next hire or current team should be a contractor or employee, and when it might be time to make a change.
Key Takeaways:
-
Know the 3 Keys of Classification: These are the factors the IRS uses to determine if someone should be classified as an employee or contractor.
-
Behavioral Control – Who decides how and when the work gets done?
-
Financial Control – Who provides the equipment and sets the pay rate?
-
Relationship – Is this a short-term project or an ongoing partnership?
-
A Signed Contract Doesn't Override Your Day-to-Day Working Relationship: If you control how, when, and with what tools someone works, they're likely an employee, no matter what the contract says.
-
Your Team Structure Will Evolve as Your Business Grows: It's normal to start with contractors and transition to employees as you establish systems, brand standards, and long-term goals.
-
Don't Forget the Tax Implications: Contractors complete a W9 and handle their own taxes (including the employer portion). Employees go on payroll, and you, the business owner, take on that responsibility.
-
Trust Your Gut and Your "Auditor Test": If you couldn't confidently explain to an auditor why someone is a contractor, it's probably time to make them an employee.
Topics Discussed:
(00:00) Intro: The Costly Risks of Misclassifying Your Team + The 3 Key Factors the IRS Uses
(02:28) Step 1: Behavioral Control – Who's in Charge of the How and When?
(02:56) Step 2: Financial Control – Who Sets the Pay and Provides the Tools?
(03:24) Step 3: Relationship – Short-Term Project or Long-Term Partnership?
(04:13) Why a Signed Agreement Isn't Enough If You're Relationship Says Otherwise
(04:44) Trusting Your Gut: The "Auditor Test" for Classification Decisions
(05:14) How Your Hiring Strategy Evolves as Your Business Grows
(08:13) Tax Implications: W9s, 1099s, and Who's Responsible for What
(09:58) Resources on Hiring and Payroll for Business Owners from Kickstart Accounting, Inc.
(10:29) Quick Recap of 3-Step Framework + Danielle's "Gut Check" Test Before Hiring
(11:06) Outro: Like, Share and Subscribe!
Related Episodes:
The Employee Expansion Blueprint: When It's Time to Convert 1099 Contractors – Ep 120
Resources:
The Ultimate Small Business Hiring Guide: From Planning to Payroll, How To Build a Thriving Team
Book a Call with Kickstart Accounting, Inc.:
https://kickstartaccountinginc.com/book-a-call/
Connect with Kickstart Accounting, Inc.:
Instagram | https://www.instagram.com/Kickstartaccounting