More and more new business owners are utilizing independent contractors instead of hiring employees.
Sure, there are many benefits of independent contractors, i.e. no benefits, less tax liability, no equipment cost, but knowing what works well for your business is essential to choosing the right type.
Let’s first look at the difference. An employee is a person who works for wages or a salary, usually has a written or implied contract, and their work is controlled by the business. An independent contractor is a business that works for another entity under a contract, there is only an exchange of fees from the business to the independent contractor.
So now, how do we decide? Well, according to the IRS, here are a few common law rules.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Benefits of Subcontracting
Using independent contractors has many advantages. You are not required to withhold taxes, purchase equipment, oversee them, or give them any type of benefits. You are essentially only responsible for paying them on time. It is up to the independent contractor to pay their own taxes.
You do not have to be tied to them for an extended period of time and only use them when needed. Your local CPA will help you fill out a 1099 when it comes to tax time.
Benefits of Employees
Now you may be thinking an independent contractor is the way to go. Let’s take a look at some of the benefits of hiring employees. Having employees allows you to find the right professional for your business as well as manage their tasks and training. You provide instruction, control their schedule and their work.
Employees do make it easier knowing they are trained properly and are working on what you need them to.
Unlike independent contracts, you are responsible for withholding taxes, including Social Security.
While there are benefits of using both independent contractors and employees, deciding what works best for you is a task you are burdened with. Reach out a trusted small business accountant who can help answer your questions for you.
If you decide to hire employees, or already have them, stay-tuned for our next blog where you will learn if it is time to use professional payroll services.