Employee or Independent Contractor? How to Avoid These 3 Common Hiring Mistakes?
From the Desk of Oriana Lieu
You are looking at hiring an employee.
Congrats! That means your business is growing!
An employee is absolutely an asset to your business.
However, many small businesses first hiring on employees see the cost and paperwork related to hiring as a reason to just buckle down and do everything themselves.
I understand the desire to do everything yourself. To maintain control of the job done and hold tight to the reputation you have built.
But I have to ask…Was the reason you got into business so that you could work all the time and feel overwhelmed and exhausted?
Probably not. And many small business owners take on more and more in an effort to save money and time…but at what cost?
How does being overwhelmed affect your health? Mental health? Personal Relationships?
By hiring another person to take on some of the workload, what does that allow you to do more or less of in your business?
When you are first hiring employees, there are so many things to consider, it can make your head spin.
The three common mistakes I see most often are:
- Hiring a new employee without a job description or reviewing the employee handbook.
- Hiring without a solid training plan, to set employees up for success.
- Hiring someone as an Independent Contractor, when they should be an employee.
The option of hiring an independent contractor seems like an easy way around all this. However, depending on what state you are in, you have to be really careful of the laws.
I’m in California and lately, there has been lots of attention on those two classifications of work. And it is not exactly so cut and dry.
A lot of small businesses rely on having employees.
However, some also don’t want to deal with the headaches of hiring, managing, and all the behind-the-scenes work of having employees.
When your business is just you… or you and a few…it becomes a question of time.
Do I have enough time to do this? Do I even want to do this? Can I just hire someone else to do it?
Therein comes the question of “Should I hire an Independent Contractor (1099) or Employee (W2) to take care of things and not have to deal with payroll?
Which one is you?
- Do it all yourself so you save some money and stay busy?
- Hire someone…. and hope they know what to do so that it just gets done?
For those of you looking to hire someone to help you in your business, consider the options of Independent Contractor VS Employee.
Independent Contractor (1099)
An independent contractor is defined by Wikipedia as: An independent contractor is a person, business, or corporation that provides goods or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work regularly for an employer but work as required, when they may be subject to the law of agency.
Our friends at the IRS look at it like this:
In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories:
- 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 a 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?
Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor.
Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor.
There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
Basically, how much control do you have over the work to be done.
If you are providing resources, supplies, benefits, or direct instruction of how you want something done, you probably do not have an independent contractor.
When considering having an employee, there are four classifications for employees.
- Full-time employee
- Part-time employee
- Part-time excluding benefits
- Special classes
You can find more info about what specifics go into each of these on indeed.com.
- Indeed is also a great place to look for talented individuals to hire.
- Consider all aspects of the employer-employee relationship. Before classifying employees, it’s vital to determine the amount of control you have over their work and the amount of money you pay them. You also need to consider the duration of their role, contracts, the work they do and their benefits to prevent misclassification.
- Make contracts align with employee job duties. When classifying employees, the classification in their employment contract must tally with their work duties. If you classify the employee as a full-time staff member on paper and their job duties are that of an independent contractor, tax authorities will go with the nature of their work. Making sure employment contracts and duties match can help you avoid job misclassification and potential penalties.
- Include employee classification on their job descriptions to manage staff expectations. This will make sure people know whether they are eligible for benefits and other company programs.
In California, workers who report their income on a Form 1099 are independent contractors, while those who report it on a W-2 form are employees. Payroll taxes from W-2 employees are automatically withheld, while independent contracts are responsible for paying them.
What’s better? Is it better to hire 1099 or W-2?
Always refer to the laws of the state that your business is in.
If you are not sure, refer to a tax professional, accountant, Enrolled Agent (EA) or bookkeeper. They can help you navigate which one is best for your business setup and tax situation.
1099 contractors have a lot more freedom than their W2 peers, and thanks to a 2017 corporate tax bill, they are allowed significant additional tax deductions. It’s attractive to people to be able to claim their income this way.
However, they often receive fewer benefits and have a shorter employment time with a company.
An employee is given a W-2 form at the end of the year to report their income and payroll taxes withheld.
Additionally, with each payroll issued for a W-2 employee, there is the filing and reporting of money withheld for state tax and federal tax agencies. This can be done by the business owner using payroll software such as QuickBooks by Intuit or Gusto. Or if you don’t want to deal with it at all, a payroll company such as APD, Paychex, can automate it all and take the hassle of doing payroll off your list of many things you have to do.
How this blog post been helpful? I know navigating all the ways to build and grow a business can be exhausting. I hope in these blogs I can give you practical advice and resource tips to help you save time and make educated choices. If you have questions or can think of anything you would like me to write about, please send me a quick message here.
See you next time! I’ll be sharing some tips and common mistakes Small Business owners make when setting their prices. Are you charging enough for your services?