Few decisions you make as a business owner are more important as adding hired help. Do you add full-time employees or independent contractors? What are the advantages of each? What are the tax implications?
There’s no question that the broad trend favors hiring independent contractors. Businesses are looking for maximum budgetary and scheduling flexibility. Also, hiring contractors allows the business to escape paying skyrocketing health care benefits in most cases.
But there are drawbacks to keep in mind. For example, an independent contractor tends to charge more for a particular task than it costs for an employee. That works well in some cases for the business, but when the task changes or different tasks emerge, an independent contractor may require additional pay, or be unwilling or unable to adapt to the changing environment.
Full-time employees, by contrast, can be trained to perform multiple duties and are able to be deployed at will to different tasks and projects with maximum scheduling flexibility and certainty of costs.
Another huge advantage to full-time employees is loyalty. If a company is well-managed, employees are motivated, loyal to management and work hard to get ahead. Independent contractors have split loyalties and have less incentive to go the extra mile to give your business the edge it needs.
If a business owner decides to hire employees instead of independent contractors, SurePayroll Insurance helps businesses control employee health care costs by offering a variety of group insurance plans and options.
Business owners who decide hiring independent contractors is the proper decision still need to do their homework in classifying them properly. A mistake in classification could leave them liable for employment tax, interest and a penalty.
According to the Internal Revenue Service, the following three criterion are used to distinguish employees from independent contractors:
- Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
- Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
- Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.
If you can direct or control only the result of the work done – and not the means and methods of accomplishing the result – then your workers are probably independent contractors.
If you are still unsure, both employee and employer can ask the IRS to make the determination by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.