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What do I need to consider in hiring my first employee as a vendor instead of a traditional employee?

Lakeville, MN |

I am a small business owner and am looking to hire my first employee. I was considering going the route of hiring an employee as a vendor (having them file a dba, which I would cover the cost). and they would take care of taxes on their personal income tax. This would strictly be an admin position, in which they would work from home. What would I really need to consider prior to going this route instead of the traditional way of hiring an employee?

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Attorney answers 1


This is a very good question that requires a complex legal analysis from a skilled attorney who practices in this area. The United States Department of Labor, the Internal Revenue Service, and various state and federal agencies are increasing scrutiny on employers who classify individuals as independent contractors. It is a "hot button" topic in our practice and misclassification could lead to significant financial consequences for your company.

Several state and federal agencies (i.e., IRS, Minnesota Department of Employment, Economic Development, National Labor Relations Board) have their own tests to determine independent contractor status. However, the central factor is typically whether the individual operates independently or is subject to the supervision and control of the company.

Factors that indicate that an individual is an independent contractor, include but are not limited to, the following:

- The IC is not subject to training
- The IC is not subject to supervision by the company
- The IC is not subject to internal reporting requirements
- The IC is not subject to a work schedule
- The IC is not subject to departmental meetings
- The IC possess a high level of skill or expertise
- The IC covers his/her own business expenses
- The IC invests in his/her own office, equipment, and supplies
- The IC works for a fixed time period
- The IC is free to work for other individuals or businesses
- The IC is compensated on a fee or project basis after submitting an invoice
- The IC is responsible for his/her own taxes, benefits, worker's compensation insurance
- The IC is subject a to well-crafted Independent Contractor Agreement

You should not take this classification decision lightly. Please feel free to contact me to discuss the issue further.

Mike McCain
612-455-0504 (direct dial)

As with all of my answers, this posting is not intended as legal advice, does not create an attorney-client relationship, should not be relied upon due to the limited facts and space available, and is not a substitute for individual legal advice from your own attorney after a full consultation

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