As a Shopify seller, one of the key decisions you’ll face as your business grows is how to classify the people who help you: Are they employees or independent contractors? This distinction isn’t just a matter of semantics—it has significant legal, financial, and operational implications for your business.
Let’s dive into the key differences between employees and contractors, how to determine the right classification, and why getting this right matters.
Why the Difference Matters
Misclassifying a worker as an employee or contractor can lead to serious consequences, including fines, penalties, and back taxes. Beyond the financial risks, it can damage your reputation and create inefficiencies in your business.
For example, if you mistakenly classify an employee as a contractor and fail to pay employment taxes, the IRS could require you to pay back taxes plus a penalty of 10% or more. On the other hand, classifying a contractor as an employee could mean missing out on the flexibility and cost savings contractors typically offer.
The Key Differences
The difference between employees and contractors often comes down to control. Here’s what to consider:
Control Over Work
Employees: Work under your direction, follow set schedules, and use your tools.
Contractors: Decide how, when, and with what tools they complete their work.
Example: Sarah, a social media manager, works on your Shopify store’s marketing. If you set her hours, provide her with a laptop, and dictate her tasks, she’s likely an employee. If Sarah works on her own time, using her own equipment and methods, she’s a contractor.
Payment Structure
Employees: Typically receive a regular salary or hourly pay.
Contractors: These are often paid per project or task completion.
Example: A developer paid $30/hour biweekly is an employee, while a contractor paid $10,000 for a completed app is classified differently.
Relationship Dynamics
Employees: These are usually hired for ongoing work and often receive benefits.
Contractors: Are typically hired for specific projects or timeframes without benefits.
Example: A marketing assistant hired indefinitely to manage your campaigns is an employee, while a contractor brought on for a three-month ad campaign is not.
Quiz: Employee or Independent Contractor?
Here’s a quick quiz to help you assess your team:
Behavioral Control
Does the company control what the worker does and how they do it?
Are their hours or schedules dictated?
Does the company provide training?
Are regular reports or updates required?
Example:
A retail employee is told how to greet customers and when to work, making them an employee.
A contractor designing your website decides how and when to work, making them independent.
Financial Control
Does the company provide tools and materials?
Are expenses reimbursed?
Is the worker paid a salary or hourly rate rather than by the project?
Is the worker restricted from working for other clients?
Example:
A construction worker provided tools and reimbursed for travel expenses is likely an employee.
A consultant covering their own costs is likely a contractor.
Type of Relationship
Is there a written employment contract?
Are benefits like health insurance or retirement included?
Is the work part of the business’s core operations?
Is the relationship intended to be ongoing?
Example:
A cashier who works directly in your retail store and receives benefits is an employee.
A web developer redesigning your Shopify site is a contractor.
Next Steps
If most of your answers were “yes,” the worker is likely an employee. If most were “no,” they are likely an independent contractor. While this quiz provides general guidance, consulting with a legal or tax professional ensures your classifications align with IRS rules.
A Biblical Perspective
As Proverbs 16:3 reminds us: “Commit your work to the Lord, and your plans will be established.” Thoughtful planning and adherence to the right processes honor God, protect your business, and ensure fair treatment for everyone on your team.
If you’re unsure about your worker classifications or need help managing your team’s finances, we’re here to guide you.
Let’s Talk
If you have any questions or need personalized help, don’t hesitate to reach out. Schedule a call with Jacob by going to https://www.jacobcurtiscpa.com/7-shopify-mistakes-calendar. We're here to help you piece together financial freedom.
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