Hiring workers is an important step for startups. Startups engage two main types of workers—employees and independent contractors. It can be difficult to determine the proper classification of a worker, especially since both federal and state law govern whether a worker is an employee or an independent contractor. Also, a worker’s classification determines how they are paid and what benefits they receive. When engaging any new worker, often the most conservative approach is to classify the worker as an employee because improperly classifying a worker as an independent contractor (when they should in fact be an employee) violates tax and employment laws, resulting in legal and financial liability (including potential personal financial liability for officers and directors).

The two main categories of workers:

Employee

• Defined as a worker who provides services to the startup under its direct supervision and control.
• Performs work that is core to the startup’s business (e.g., an engineer at a software company).
• Startups withhold taxes from the employee’s wages, pay payroll and other taxes to the government, and issue the employee an IRS Form W-2 each year for any wages earned.

Independent Contractor (also known as a consultant)

• Defined as a non-employee worker who provides non-core, highly skilled, and project-oriented services to the startup free from its direct supervision and control.
• Startups do not withhold or pay taxes on behalf of contractors. Instead, startups...

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