By Deborah Sweeney, MyCorporation
Your small business is ready to hire its first employee – or should you hire a contractor? And what happens if your business accidentally treats an employee like a contractor or vice versa?
When it comes to hiring new team members, there are more rules involved for determining who does what and how it affects your business than you might realize. Here’s a look at some common dos and don’ts for hiring both employees and contractors:
- Do know the difference between employees and contractors.
- Don't hire employees until your profit margins are steady.
- Do hire contractors for one-off or specialized projects.
- Do communicate regularly with contractors.
- Don't misclassify workers.
Read on for more details.
Do Understand the Difference between an Employee and a Contractor
The IRS states that employees are classified as individuals that work for one employer with training and duties performed as dictated by others. They have their income taxes, Social Security, and Medicare withheld and employers pay unemployment taxes on wages paid to the employee.
Contractors, on the other hand, are hired to do a specific job. They work with multiple clients, set their own hours, and are responsible for paying expenses like federal taxes on FICA and Social Security.
Once the employer has a better understanding of what the relationship looks like between the employee/contractor and their company, they are able to file the appropriate forms and pay taxes for the worker. (Form W-9 for contractors and Form W-4 for employees, in case you weren’t sure which is which!)
Don’t Hire Employees Until Your Profit Margins Are Stable
According to Entrepreneur, profit margins ultimately determine the number of full-time employees your small business has on its staff. So long as your profit margins are variable, you might consider hiring contractors until your profits become more predictable.
At the end of the day, both employees and contractors are hired to do a job for your business. If there’s no money to pay them or if cash flow dries up early on, they’ll exit pretty quickly.
Do Hire Contractors If Demand Is Uncertain
If you’re unsure of the demand for the work, consider hiring a contractor. Similarly, if the project requires a specialized skill set that you and your employees don’t have, it might make sense to contract out the work.
Do Make Communication with Contractors a Priority
Contractors typically work remotely, unlike employees who may spend the better part of their workweek on site. That means it’s critical to keep the lines of communication open with your contractors. Make sure you have a wide variety of ways to keep in touch, including email, phone calls, texting, Skype, and FaceTime calls.
Don’t Misclassify Employees or Contractors
This happens more than you might think. If an employer accidentally misclassifies a worker, there are relief provisions available from the IRS to businesses with reasonable basis claim. In order to qualify, businesses must file required federal information returns on a basis consistent with the worker.
Additionally, if a contractor feels as though they have been misclassified by an employer, they must file Form SS-8 for the IRS to review and to determine the worker’s status.
Businesses that misclassify contractors as employees may be required to pay back taxes for federal and state income taxes along with Workers’ Compensation, unemployment, Social Security, and Medicare. Be sure to thoroughly review and understand how employees differ from contractors before hiring in order to keep any confusion at bay.
About the Author
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @deborahsweeney and @mycorporation.