Business Contract – Employee vs. Independent Contractor

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Dear M&M:

I have been told I should use a business contract when working with others.  I am not sure what that all means?

– Karen

Dear Karen:

Business contracts are often used in situations where a project needs to be completed by meeting specific guidelines or when a business “outsources” work by hiring freelancers or consultants. A contract serves to protect the interests of all parties involved by ensuring that work is completed on time and that workers are properly compensated for their efforts. Contracts contain a variety of specific terms that must be fulfilled. The number and types of terms can vary, although some terms are fairly standard. Duties: A business contract will spell out the specific duties required to be performed by each party. Examples of contract duties can include the obligation of a distributor of a product to attempt to sell it to a third party, while the product manufacturer agrees to compensate the distributor based on his results. Duties can also include what a party is not permitted to do, such as if the distributor is forbidden from hiring another party to solicit business. Rights: Another common contract term outlines the rights to which each party is entitled. For example, if the two parties disagree on the quality of work performed or the amount of compensation involved, the contract may stipulate that a third-party arbitrator be used to settle the dispute. The contract may also indicate each party’s right to sue. Dates: The terms of a contract will indicate any relevant dates. Common dates can include the date by which a contracted project must be completed, the beginning and ending dates of a period of employment or the dates any payments are due.

Payment: The contract terms will specify the amount and method of payment. For example, the contract may stipulate that payment in full is required upon the completion of a project or that it be made in increments as each phase of a project is completed. The terms will also note any late fees assessed for work not completed on time or interest accrued if a party does not make a timely payment installment. Confidentiality: A contract may indicate that the parties must agree not to share confidential information that could harm one or the other. For example, a business that hires a freelance writer to author its marketing materials, such as brochures and website pages, may need to share information about the company’s marketing strategy so that the writer can do her job effectively. The writer must agree not to share this information, particularly with the company’s competitors. Never enter or start any agreement if you are unsure of any of the elements of the business contract. As always bring in the professionals and use an attorney if there are any doubts.



Dear M & M:

I am just starting a company and I don’t fully understand the difference between an employee and an independent contractor. I know that employees are subject to payroll taxes, workman’s comp, and other labor laws; whereas independent contractors are responsible for their own payroll taxes, workman’s comp, and other labor laws.  Can I just make everyone an independent contractor and have them be responsible for their own payroll taxes?


Dear Robert:

An easy answer to your question on the criteria for deciding who is an employee and who is an independent contractor is dependent on the amount of control you have over the worker. If you are controlling when, where, and how much they work more likely they will be classified as an employee. “Facts that provide evidence of the degree of control and independence fall into three categories:  Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Type of relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business”? –IRS Common Law Rules- It is important to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. If you still are still unsure contact your accountant or IRS to get further assistance.



To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email


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