Employees vs. Independent Contractors
At some point in your publishing career, you will pay another human being to do something for your business. Maybe it's an editor who has worked with you on a dozen books. Maybe it's a virtual assistant who manages your inbox ten hours a week. Maybe it's a cover designer you've used for years or a proofreader who is on retainer for every release.
The moment money changes hands for services rendered, the IRS has an opinion about the nature of that relationship — and that opinion has significant tax consequences for both you and the person you paid.
The distinction between an employee and an independent contractor is one of the most consequential business decisions an indie author makes, and one of the most frequently misunderstood. Getting it wrong doesn't just create paperwork problems. It creates back taxes, penalties, and potential personal liability that can reach through your LLC's corporate wall.
This is also one of the areas where the phrase "gig worker" creates the most confusion. The fact that someone works for you occasionally, remotely, or on a project basis does not automatically make them an independent contractor in the eyes of the IRS. Classification depends on the nature of the working relationship — not what you call it, not what your contract says, and not what either party prefers.
Why This Matters So Much
When you hire an employee, you are responsible for:
Withholding federal income tax from their paychecks
Withholding the employee's share of Social Security and Medicare taxes (7.65%)
Paying the employer's matching share of Social Security and Medicare taxes (7.65%)
Paying federal unemployment tax (FUTA) and potentially state unemployment tax
Filing quarterly payroll tax returns (Form 941)
Issuing a W-2 at year end
Potentially providing benefits, depending on your state and business size
When you hire an independent contractor, your obligations are much simpler:
Pay the agreed amount
Issue a Form 1099-NEC if you paid them $600 or more during the year
The contractor handles their own taxes entirely
The difference in administrative burden and cost is substantial. This is why misclassification almost always runs in one direction: businesses call people contractors when the IRS would call them employees. The financial incentive to misclassify is real — and the IRS knows it.
The IRS Test — What Actually Determines Classification
The IRS uses a multi-factor test grouped into three categories: Behavioral Control, Financial Control, and Type of Relationship. No single factor is determinative. The IRS looks at the totality of the relationship.
Behavioral Control
Does the business control how the worker does their job — not just what the result is, but how they achieve it?
Points toward employee: You tell them what hours to work. You require them to use specific tools or methods. You provide training on how the work should be done. You direct the sequence of tasks.
Points toward contractor: You specify only the result. The worker decides when, where, and how to accomplish it. They use their own methods and equipment. You don't provide training.
Financial Control
Does the business control the financial aspects of the worker's job?
Points toward employee: You pay them a regular wage or salary regardless of output. You reimburse expenses. They cannot work for competitors. They have no financial investment in their own business tools.
Points toward contractor: They set their own rates. They invoice you for completed work. They have their own business expenses and tools. They work for multiple clients. They can make a profit or a loss on the engagement.
Type of Relationship
How do the parties perceive their relationship?
Points toward employee: There is a written employment contract. You provide employee benefits (insurance, vacation, pension). The relationship is indefinite and ongoing. The work performed is a key aspect of your regular business.
Points toward contractor: There is a written independent contractor agreement. No benefits are provided. The relationship is project-based with a defined end. The work is specialized and outside your core business activities.
The Author's Practical Reality — Who Is What
Let's apply this to the people indie authors typically pay.
Almost always independent contractors:
Freelance editors: They set their own rates, work on their own schedule, use their own methods, have multiple clients, and are engaged per-project. Classic independent contractor.
Cover designers: Same analysis. They run their own business, serve multiple clients, and deliver a completed product. Independent contractor.
Narrators: Per-project work, their own equipment, their own studio time, their own business. Independent contractor.
Formatters: Per-project, specialized skill, multiple clients. Independent contractor.
Proofreaders: Per-project, their own methods, independent. Contractor.
Ghostwriters: Per-project, their own creative process, their own workspace. Generally independent contractor, though the more you direct the creative process, the closer it gets to employment.
More complicated — analyze carefully:
Virtual assistants: This one depends heavily on the specifics. A VA who works exclusively for you, on a set schedule you dictate, using your systems and tools, for an indefinite ongoing period, is more likely an employee. A VA who manages their own business, works for multiple clients, sets their own schedule, and invoices you per project is more likely a contractor. Many author VA relationships fall somewhere in between. Analyze the specifics.
Social media managers: If you tell them what to post, when to post, and provide all the content, and they work exclusively for you — employee territory. If they run their own social media management business, have other clients, and operate autonomously — contractor.
Personal/author assistants: If someone works regular hours in or around your home, handles your schedule and correspondence, and works exclusively for you — the IRS will likely view them as a household employee or business employee. This is one of the most common misclassification errors in indie publishing.
Watch out for this specific scenario:
You have a freelance editor you've worked with for five years. You send them every book. You expect them to be available when you need them. You've started directing how they edit — the style they use, the software they deliver in, the turnaround time. You don't expect them to work for anyone else during your crunch periods.
That relationship has drifted from independent contractor toward employee — regardless of what your original contract said, regardless of what you both prefer, and regardless of how you've been paying them. The IRS looks at the actual working relationship, not the paperwork.
The Consequences of Getting It Wrong
If the IRS audits your business and determines you have misclassified employees as independent contractors, the consequences cascade:
You owe the employer's share of Social Security and Medicare taxes for every year of the misclassification
You may owe the employee's share as well if you cannot collect it from the worker
You owe federal unemployment taxes (FUTA) that should have been paid
You owe interest on all unpaid taxes from the date they were due
You face penalties for failure to withhold and failure to file payroll returns
You face penalties for issuing 1099s instead of W-2s
In aggregate, these costs can easily exceed the amount you paid the worker. And because these are tax obligations — not business debts — your LLC's corporate wall provides less protection than you might expect. Tax liabilities can follow the responsible party personally.
There is a voluntary correction program available through the IRS called the Voluntary Classification Settlement Program (VCSP) that allows businesses to prospectively reclassify workers with reduced penalties. If you suspect you have a misclassification situation, talk to a tax professional about this program before the IRS finds the issue for you.
Form 1099-NEC — Your Contractor Reporting Obligation
When you pay an independent contractor $600 or more during a calendar year for services, you are required to issue them a Form 1099-NEC by January 31 of the following year. You also file a copy with the IRS.
To issue a 1099-NEC, you need the contractor's:
Legal name (as it appears on their tax return)
Business name (if different from their legal name)
Address
Taxpayer Identification Number (Social Security Number or EIN)
Collect this information before you pay anyone, using a Form W-9. Do not wait until January. Chasing contractors for their W-9 information in the new year — when you're already racing toward tax filing deadlines — is avoidable with a simple habit: get the W-9 before you write the first check.
You can download a blank Form W-9 from the IRS website. Keep the completed W-9 on file — you do not submit it to the IRS, but you need it to prepare the 1099-NEC accurately and to defend your filing if questioned.
Hiring an Actual Employee — What's Required
If you determine that someone working for your publishing company is genuinely an employee, here is what you need to do:
Obtain an EIN (covered in a previous article — required for all employers)
Have the employee complete Form I-9 to verify their eligibility to work in the US
Have the employee complete Form W-4 to determine federal income tax withholding
Register with your state's labor department for new hire reporting (required in all states)
Set up payroll to withhold and remit federal income tax, Social Security, and Medicare taxes
File Form 941 quarterly (Employer's Quarterly Federal Tax Return)
File Form 940 annually (Federal Unemployment Tax Return)
Issue Form W-2 by January 31 of the following year
Obtain workers' compensation insurance if required by your state
This is why payroll services like Gusto, ADP Run, and QuickBooks Payroll exist. For most indie authors who hire their first employee, the administrative machinery of payroll compliance is genuinely unfamiliar, and a payroll service handles the mechanics while you focus on your business.
AI Tools and Worker Classification
AI tools can help you think through a worker classification question before you consult a professional:
Describe the working relationship in detail to an AI tool and ask it to analyze the behavioral control, financial control, and relationship type factors. This is a useful first pass that helps you understand where the ambiguity lies before you bring a professional into the conversation.
AI can walk you through the IRS Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes) and help you understand what information the IRS would want to see if you submitted a formal determination request.
For 1099-NEC preparation, AI tools can help you understand the filing deadlines, penalties for late filing, and the difference between a 1099-NEC (nonemployee compensation) and a 1099-MISC (rents, royalties, and other payments).
Classification decisions with real ambiguity — particularly for ongoing VA and assistant relationships — should be reviewed by a tax professional. The IRS's free determination process (Form SS-8) is also available if you want an official ruling before the relationship begins.
ScribeCount Author OS — Tracking Contractor Payments
Every payment you make to a contractor is a business expense that reduces your publishing LLC's taxable income. Keeping those payments organized — by contractor, by project, by tax year — is essential both for accurate 1099-NEC preparation and for maximizing your Schedule C deductions. ScribeCount tracks your publishing income side of the ledger. Pair it with your bookkeeping software (QuickBooks, FreshBooks, Xero) to track contractor payments as categorized business expenses. The combination of ScribeCount's royalty income data and your bookkeeping software's expense records gives your accountant the complete profit and loss picture your publishing LLC needs at tax time — and gives you the documentation you need if any contractor payment is ever questioned.
Conclusion
The employee vs. independent contractor distinction is not a technicality. It is a foundational business classification that determines your tax obligations, your administrative responsibilities, and your legal exposure for every person who works for your publishing company.
Most indie authors hire independent contractors — and most of those relationships are correctly classified. But as your business grows, as working relationships deepen and become more ongoing, and as the nature of how you direct people's work evolves, the classification question deserves a periodic review.
Get the W-9 before you write the first check. Issue the 1099-NEC on time. And if a working relationship feels more like employment than contracting, talk to your accountant before the IRS tells you what it is.
- Randall