Employee or Independent Contractor: Understanding the Difference and Its Implications

In one of our most recent podcast episodes, we discussed a topic that often confuses many business owners and directors – the classification of staff members as employees or independent contractors. This blog post aims to share the insights from that discussion, highlighting the importance of correctly classifying workers and the potential consequences of misclassification.

The Importance of Correct Classification

During this episode, Kate and Carrie emphasized the significance of correctly classifying workers. They pointed out that some directors and owners might be tempted to classify their staff as contractors to avoid paying taxes. However, this practice is illegal and can lead to penalties and fines.

They explained that if someone is treated like an employee, they should be classified as such and not as a contractor. For instance, if a worker is told what to do, provided with materials, and works exclusively for one employer, they are considered an employee. On the other hand, consultants or trainers who bring their own supplies and have more control over their work would be considered contractors.

The Consequences of Misclassification

Misclassifying workers can have severe consequences, including the IRS seizing bank accounts. Therefore, it’s crucial to follow the IRS guidelines and properly classify workers to avoid legal issues.

Determining Employee or Contractor Status

Kate and Carrie discussed several tests that can help determine whether someone is an employee or a contractor. For example, if the boss has the right to fire the person, they are an employee. If the business pays for the worker’s expenses or sets their hours, they are also considered an employee. Conversely, if the worker is hired through an employment agency, they may be classified as a contractor.

Addressing Misclassification

If you’ve misclassified workers in the past, it’s advisable to come clean to the IRS and be prepared for any consequences. Carrie provided some practical advice on how to approach the difficult conversation with the owner or board who may resist changing the classification of staff members.

She suggested involving accountants or bookkeepers, who are unlikely to support illegal practices, to help convey the message to the owner. If there is no professional service in place, Carrie advised doing thorough research before having the conversation. She recommended visiting the IRS website and looking for documents on contractor versus employee classification.

Correcting Misclassification

Kate emphasized the need to correct the situation immediately and reach out to the IRS to rectify any back payments. Failure to address the issue can lead to severe penalties and fees, and in some cases, even jail time.

Protecting Your Business

Kate and Carrie stressed the need to protect oneself and one’s business by properly classifying workers. They advised listeners to take action now, even if it means signing up for a payroll service like QuickBooks, to avoid potential issues with taxes and payroll forms at the end of the year.

Seeking Guidance

If you feel unsure about the legalities of running a business, Kate and Carrie encourage you to seek guidance from a business coach or mentor. They believe that having someone help navigate potential surprises and ensure all legal requirements are met is crucial.

Texas Director does offer business coaching. Fill out the form on our website to schedule an initial meeting: https://texasdirector.org/coaching/


In conclusion, understanding the difference between an employee and a contractor is vital for any business owner or director. Sharing this information with others, particularly managers and childcare center owners, can help them avoid penalties and fees. Remember, correctly classifying your workers is not just a matter of best practices, but it’s also a legal requirement.


Check out our podcast episode to learn more!