Your Contractors Might Actually Be Employees
If you run a small business, chances are you’ve asked yourself: “Should I hire people as contractors or employees?” It’s a common question — and a common source of trouble.
On the surface, independent contractors sound easier. Less paperwork, no payroll taxes, more flexibility. But here’s the truth: if someone is doing the core service your business provides, the IRS and state agencies probably see them as an employee — no matter what you call them on paper.
Employees vs. Contractors: The Key Difference
The dividing line is control and integration.
Employees work under your direction, use your systems, and represent your brand.
Contractors run their own independent businesses, set their own prices, and serve multiple clients.
If someone is sitting in your business, doing the exact work your company is known for, that’s employee territory.
What is Employee Misclassification?
Employee misclassification is the incorrect designation of a worker as an independent contractor when, by law, they should be classified as an employee. This is a common issue because the legal tests used to determine a worker's status are often complex and vary by jurisdiction (state, federal, and even country).
The Risks of Misclassification
Misclassifying workers isn’t just a technicality — it’s expensive. If the IRS or your state labor board reviews your books, they can reclassify your contractors as employees. That often means back taxes, penalties, and interest — all coming out of your pocket.
California (and many other states) uses the ABC Test, which makes it almost impossible to call someone a contractor if they’re providing the main service your business sells.
Why Getting It Right Matters
Bringing people on as employees protects your business and your team. It keeps you compliant, avoids costly surprises, and gives your workers the benefits and protections they deserve.
Yes, payroll can feel like “one more thing” for a small business owner. But setting it up right now is far cheaper and less stressful than facing an audit later.
The good news? Payroll doesn’t have to be complicated or expensive. With the right setup, it can run smoothly in the background while you focus on growing your business.
Bottom line
If your workers are doing the heart of your business, treat them as employees. It’s the safer, smarter, and more sustainable choice for your company’s future.
