Running a business on your own means you’re used to working long hours and juggling lots of responsibilities.
Whether your goal is to reduce those long hours, to improve productivity, or to bring in new expertise, hiring independent contractors or employees might be just what your business needs to keep growing.
Building your team is an exciting step, but some aspects of hiring and managing workers could pose a challenge if you jump in without learning the basics.
For example, you’ll need to:
- Stay compliant with local, state and federal employment laws.
- Decide whether to hire contractors and employees.
- Stay organized to manage all the aspects of your employment
It may sound like a lot when you first start out. But if you take care to check little legal boxes along the way, the whole process will be a lot easier in the long run. Once you’ve covered yourself with basic employment agreements, handbooks and other solid HR practices, you’ll be in an excellent position to make the most of your new workforce.
This eGuide to Small Business Hiring will lead you through the whole process. Above all, we want to show you how to get the legal basics nailed down so you have more time to do what you do best.
Independent Contractor or Employee?
When you need to bring in more help, the first thing to figure out is whether it’s best to hire an employee or an independent contractor. In this chapter, we’ll explain what you need to know about this distinction, why it’s important to both you and your workers, and the potential consequences of misclassifying the people who work for you.
It’s best to start by understanding the differences between these two types of workers.
Someone who performs services or labor for you on an ongoing basis, and you control what will be done and how. Employees stay on past the completion of each project. They tend to work at your businesses location, using equipment and tools that you supply.
Someone who performs services or labor for you, but is responsible only for the results, not how the project will be executed. A contractor’s work is usually done at the completion of each project— there are no ongoing responsibilities. Often they charge more, use their own equipment, set their own schedule and take care of their own business expenses.
It’s a good rule of thumb to base hiring decisions not only on the type of working relationship you want to have, but also your tax responsibilities.
Why it’s Different
Since contractors are self-employed, an employer is more like the contractor’s client than their supervisor. That means the contractor is responsible for paying taxes on their earnings. Independent contractors also don’t get a lot of the same benefits as employees: they’re not eligible for unemployment benefits, worker’s compensation, and social security. Plus, they don’t get offered sick leave, vacation, health insurance, and any other benefits an employer might offer to attract an employee. The contractor shoulders all of these costs since they’re treated like a self-employed business.
All of this is fine as long as the independent contractor gets to be their own boss as it’s intended. Problems can arise when employers want the best of both worlds—they hire their workers as independent contractors, but treat them like employees, dictating when and how the work is done. Employers avoid paying payroll taxes and providing benefits, but in essence they have an employee who they can manage directly.
What Happens if You Get it Wrong
Say one of your salespeople has his own office and works on commission. You have a second salesperson who works remotely and doesn’t receive benefits. You decided to hire them as independent contractors, but based on your working relationship, the IRS or another government agency might classify them as employees. If you misclassify employees as independent contractors, you’ll be on the hook for back payroll taxes, plus fines.
To prevent that from happening, make sure everyone is clear on the nature of the working relationship. Choose the designation carefully based on the above guidelines, and create an employment agreement or an independent contractor agreement to document it. Then remain consistent with the classification. For example, if you treat workers like contractors in practice (and don’t pay payroll taxes) and then claim a tax deduction for having employees, a tax audit notice is a lot more likely to come your way. Workers can also make a complaint to the IRS if they feel they’ve been misclassified.
Keep in mind that someone who starts as an independent contractor can assume responsibilities that are more and more like an employee over time. If you have a long-standing relationship with a contractor, consider bringing them on board officially to avoid misclassifying them.
We’ll be focusing on the employment relationship for the remainder of this guide. For more business tax information or information on worker designations, go to the Internal Revenue Service website.