According to the U.S. General Accounting Office, independent contractors now constitute 7.4 percent of the total U.S. workforce. The financial aspects of hiring an independent contractor may appear attractive — you don't have to pay for benefits such as health care, for example.

There are, of course, various factors to take into consideration, so the below will touch on a few of those factors, but you should always consult with an advisor before taking action.

Salary vs. Contract

Yes, you will probably pay more per hour for your independent worker than you would for a staff employee, but hiring a regular employee will likely still cost you more.

With an employee, you must pay employer's portion of the employee's Social Security and Medicare taxes, as well as federal and state unemployment taxes, state worker's compensation insurance and workers' compensation insurance. But with an independent contractor, according to the IRS, your firm generally doesn't need to withhold income, Social Security or Medicare taxes. Regarding benefits, employers are not required to provide vacation to contractors. Similarly, they can choose not to provide health care (but may be subject to a penalty under the Affordable Care Act).

In addition, independent contractors generally don't have the employment rights under state and federal laws that employees do — helping to head off potential employment lawsuits. You may, however, still be liable for injuries contractors suffer while on your job.

Independent contractors do have one other special advantage in the workplace: copyrights. If your contractor produces written work, art, graphics, photographs, software, films and videos, designs and so on, they own the rights to the work. Your best defense is a written work-for-hire agreement or some other written agreement in which the contractor transfers some or all of the copyright to you.

Classification Key

According to the U.S. Small Business Administration, factors to be considered when determining if a person is a contractor include: if they invoice for work completed, have more than one client, have their own tools, set their own hours and keep business records.

The IRS states that to determine whether a worker is considered a contractor, the degree of control must be examined. That control falls into three categories:

  • Behavioral. Does the organization dictate or claim to have power over the work the employee does or how they manage that work?
  • Financial. Does the organization control payment and expense reimbursement to the employee?
  • Type of relationship. Are there benefits similar to what an employee would receive or an expectation of long term involvement?

If you hire an employee, but accidentally misclassify them as a contractor, you could potentially open your firm to investigation by the Department of Labor (DOL) or the IRS to determine whether the misclassification was unintentional, intentional or fraudulent. The government takes misclassification very seriously. In 2013 alone, DOL Wage and Hour Division investigations nabbed more than $83 million in back wages for some 108,050 misclassified workers in low-wage industries.

Remember that a misclassification can be costly for your organization. So it is critical to understand that your best course of action may be to consult with a professional/expert to mitigate as many compliance risks as possible.

Smart Moves

If you're unsure whether a worker is an employee or an independent contractor, you can file Form SS-8, "Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding," with the IRS. (The form may be filed by either you or your worker.) The IRS then determines for tax purposes the worker's status; however, it can take at least six months to get a determination.

Take the time at the outset to properly evaluate whether a worker is an employee or independent contractor in order to help avoid the costly consequences of misclassification.

Tags: contractors