In every country there are special administrative bodies that monitor how companies pay taxes. Any payment that is made by the company is subject to tax, except payrolls. When examining a company’s financial activity, the government services check if payrolls are indeed made to fully and legally hired employees. If a payment is a payroll, there also should be information provided concerning social and medical insurance payments made for every salary payout for every employee. If there is a salary payout not followed by necessary insurance payments, then there may be fines for not providing for an employee.
To avoid such situations, companies should guide themselves with the following questions:
- When, where and how is the work done?
- Employee. At the employer’s premises, with their resources and tools. There is a schedule to stick to and a regular reporting schedule.
At their premises, with their own tools and resources. There is no schedule to work on, but there is a deadline for when a task needs to be done.
- Does the worker work full-time?
They may work full-time or part-time, but it is a rigid schedule that matters. The end result of employed labor is a particular function performed by the worker.Independent contractor.
They work on any schedule that suits them. However, there is little control over their activity and there are deadlines to navigate their work. The end result is a tangible product, rather than a function.
- Does the worker get paid periodically (monthly, weekly, hourly) or in full after a project is complete?
Hired workers are paid regularly.Independent contractors.
As a rule, they are paid in full once a project is complete. However, there may be some payment upfront, depending on the contractor’s conditions.
- What document regulates the relationship between the company and the worker?
With a hired worker, it is a labor contract. This document regulates the relationship and it is meant to be long-term. In a labor contract, the parties are not independent, as an employee depends on their employer.Individual contractor.
With a freelancer, it is a service agreement. In a service agreement, the parties are independent, meaning contractors pay their own taxes and companies don’t owe them anything but the agreed-upon wage.