As a startup business or even a single-member LLC, there comes a time when you cross over the line and you need help with the workload or a specific task for a project. Many businesses look to independent contractors for help.
Independent contractors are self-employed individuals who report their business income, expenses and deductions on Schedule C. As a business owner, you may grow increasingly reliant on help to get the work done, and that is when the lines between independent contractors and employees become blurry.
Qualifying a worker as an independent contractor or an employee isn’t something your business does out of convenience. The IRS looks at 20 factors of common law to help identify an employee-employer relationship. The determination is “fuzzy” as the importance of each factor often depends on the occupation and the context in which services are performed. You do not have to satisfy x-number of criteria. Often, each case is considered individually.
Some of the most telling factors include whether or not you have the ability to direct workers not only on what they do, but how they do it. If you retain behavioral control, you likely have an employee. Employees also do not have the opportunity to realize a profit or suffer a loss as a result of the quality of their work. Employees also have equipment and supplies provided to them, and they are reimbursed for business expenses. Other factors include time worked. Independent contractors may have a deadline set by you, but they are free to come and go as they please, working hours that are convenient for them. Alternately, you can require that employees report to the office at a specified time and expect them to work a set amount of hours per day.
The most important difference between employing independent contractors and employees is taxes. As a business, you can deduct what you pay an independent contractor and issue a 1099 to anyone paid more than $600. The independent contractor is responsible for reporting his income and paying the taxes due on his own Schedule C. Likewise, the independent contractor is able to deduct his travel, equipment or other business expenses. Additionally, your business may not be his only client.
If you choose to hire the worker as an employee, you have several responsibilities as employment taxes are not something to be trifled with. The IRS pays close attention to this area. You will have to obtain an Employer Identification Number, a Georgia Department of Labor Account Number, State Withholding Account Number, and you’ll need to set up a system and maintain records for withholding taxes. You’ll also be responsible for verifying an employee’s eligibility for employment and registering newly hired employees with your state. You may also need to obtain workers’ compensation insurance and post the required notices in your office.
Hiring employees is a big decision for a business as it adds a layer of complexity and responsibility to your duties. When you are in control of sending someone else’s money to the IRS for tax withholding, you cannot afford to make any mistakes. Despite the work it takes to hire employees, there are advantages for your business. You can provide benefits, such as health insurance, vacation and retirement plans, that can attract talent to your business. Employees often appreciate the security of a job and they often take pride in being part of a successful team. Additionally, that loyalty can mean you can trust employees with information or responsibilities that you would not delegate to an independent contractor.
If you have questions about the independent contractors or employees your business may have, the experts at Henssler Financial are here to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
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