Back when you started your own small business,you most likely started out by hiring a few independent contractors. You were hesitant to hire anyone outright, and simply needed a little help along the way.
However, suddenly you became large enough and successful enough that the need to hire employees became evident. Perhaps you needed workers completely dedicated to your business alone. Maybe your small business tax accountant started advising you to add what had once been considered independent contractors to the payroll in order to avoid auditing. Or, with all the blurred lines within this gig economy we live in now, maybe you are simply confused about which is which.
How do you know when it’s the right time to hire an employee as opposed to an independent contractor? What does each look like in your small business? What is the true benefit of each?
What An Employee Brings To The Table
The most significant benefit bringing an employee into your small business is the complete control that decision gives you as the owner. That person is trained by you, scheduled by you, and delegated specific tasks by you in exactly the way you prefer them to be done. Additionally, once that training and delegating is complete, you can feel confident to give out one of the many hats you’ve been wearing up until this point.
Employees also bring with them a sense of pride in the company. Because their financial security depends on your employment, the worker is often more dedicated and loyal. This results in less turnover and more consistency overall.
How Hiring Employees Affects Business Tax Preparation
Why do so many small business owners hesitate, then, to hire employees? Hiring an employee brings in a host of regulations along with it. On top of adhering to payment stipulations and overtime rules, your company must now withhold payroll taxes, social security, and Medicare, as well as file a W-2 for each one. Small business tax accountants are able to assist business owners with how to do this while abiding by IRS regulations.
In addition, most full-time employees will expect to receive benefits, as well as any training or licensing required. Whereas independent contractors have to seek all of that out for themselves, with an employee, it is now the company’s responsibility.
How Independent Contractors Can Help Your Business
When a business simply wants a job done well, does not feel the need to control the process, and wants to avoid all of the payroll responsibilities that come with an employee, hiring an independent contractor tends to be the way to go. Independent contractors are especially attractive to complete short-term projects, or perform services not linked to the core of the business. For instance, a cleaning service for the office or an IT service hired to update a computer system could both be paid as an independent contractor, or an IT service hired to update a computer system.
Independent contractors add greater flexibility, as hiring and firing becomes a quicker and easier process. If you weren’t impressed by their work, you don’t need to mentor or train them. You simply avoid hiring them again.
Potential Drawbacks of Hiring Independent Contractors
Though employees are the more costly and time-consuming option, they have a razor sharp focus on your business. Conversely, independent contractors set their own hours and can work for a number of businesses at a time. They are also able to decide when and how the job is done, which, for a small business owner, may be a riskier option.
When you hire workers for your small business, make sure you’ve reviewed the benefits of each, and that you classify your workers correctly. Misclassifying a worker, and thus paying incorrect amounts, could end up with an IRS audit. If you are in doubt about the classification of a worker, our small business CPA firm in Charlotte can help you out.
Resources:
https://www.sba.gov/business-guide/manage-your-business/hire-manage-employees