Contractor or Employee? Why “Just Pay the Guy” Can Cost You

You’ve got work to get done. Someone’s ready to do it. It’s tempting to say, “Just pay the guy.”
But before you hit “send,” take a deep breath; how you classify that person (employee vs. contractor) determines whether you’re running a smooth operation… or inviting the IRS to your next bonfire.

The IRS Doesn’t Care About Vibes

It doesn’t matter what you call someone, what matters is how the work is structured. The IRS looks at three main factors:

1. Behavioral Control: Do you tell them how to do the work (hours, methods, tools)?
   • ✅ Contractor: You say what needs doing. They decide how to do it.
   • 🚫 Employee: You’re directing their day-to-day or setting schedules.
2. Financial Control: Who carries the risk?
   • ✅ Contractor: They provide their own equipment and invoice for work.
   • 🚫 Employee: You pay them regularly and reimburse expenses.
3. Relationship: What’s the long-term expectation?
   • ✅ Contractor: Short-term or project-based.
   • 🚫 Employee: Ongoing relationship, even if part-time.

If your “contractor” looks like an employee under those rules, congratulations — you may owe back payroll taxes, benefits, and penalties. The IRS and state agencies can (and do) audit small businesses for this, and reclassification gets expensive fast.

When You Don’t Have a Contract (Even If You Got the Classification Right)

Let’s say you did classify correctly — great! But if you never put it in writing, you’ve created a whole different flavor of chaos.

Without a contractor agreement, you risk:

• Disputes over deliverables (“I thought that edit was included.”)
• Missed tax documentation (no W-9, no 1099, cue another round of chaos)
• No clear ownership of intellectual property (that logo, code, or design might legally belong to them, not you)

Without an offer letter or employment agreement, you risk:

• Confusion about start dates, pay frequency, or benefits (“Wait, I thought I had PTO?”)
• Potential wage disputes if hours or duties weren’t clearly outlined
• Lack of documentation in case of termination or unemployment claims

Even the simplest one-page agreement can prevent all of this. Contracts don’t just protect the company, they also show that you take the working relationship seriously, which helps with recruiting, retention, and morale.

How to Get It Right

1. Have a signed agreement.
Even if it’s your friend’s cousin doing Facebook posts for you, you need a contractor agreement spelling out the scope, rate, and timeline. For employees, an offer letter that covers benefits, pay period, and start date is the minimum.

2. Route payments correctly.
Employees - set up in your payroll system with a start date and pay frequency.
No exceptions, no shortcuts.

Contractors - set up in your contractor payment system with start date, pay frequency/amount, and scope of work

3. Keep clean records.
Invoices, contracts, correspondence — all of it. If you ever need to defend your classification, documentation wins the day.

Bottom Line

If someone’s wearing your logo, using your tools, and showing up when you say so, they’re probably your employee.
If they send you an invoice for finishing a project on their own time, they’re probably a contractor.

And if you’re still not sure? Don’t “just pay the guy.”
Ask your accountant. (Ideally one who writes blog posts like this.)