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Tips for Hiring Help in Your Business

Growing your business includes finding and hiring the right people to help you in the business. When it’s time to hire help in your business it is very important to correctly decide whether the individual providing services to your business should be treated as an employee or independent contractor.

Before you hire help, you should run a test to see if your new worker should be paid as an employee or as an independent contractor. Generally it is easier for the business owner to pay the person as a contractor and issue a Form 1099-NEC at the end of the year. However, as we will discuss below, there are tax implications to this decision.

If you retain control of what, when and how the work will be performed, the person will generally be an employee. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public. Independent contractors generally provide services to many businesses and they usually hold out to the public that they operate a business with business cards, social media pages or a website.

Independent Contractor vs. Employee Test

Whether a worker is an independent contractor or an employee depends on the relationship between the worker and the business. Generally, there are three categories to examine:

  • Behavioral Control − Does the company control or have the right to control what the worker does and how the worker does the job? If the answer is yes, then you should pay the worker as an employee.

  • Financial Control − Does the business direct or control the financial and business aspects of the worker's job. Generally if the worker provides their own supplies, tools and insurance they are independent contractors. If you reimburse for their supplies, then the test leans more toward employee classification.

  • Relationship of the Parties − You should always have a written contract with your independent contractor to document your relationship and disclose the tax obligations associated with the contractor pay. Independent contractors are responsible for setting aside and planning for the tax on their income. In an employee relationship, you should also document your policies including PTO (paid time off), employee benefits and compensation agreements. The employer must withhold Social Security/Medicare taxes and federal and state income taxes from the paychecks. They must also pay unemployment and other state payroll taxes on the employee’s wages.

Misclassified worker

Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee without a reasonable basis, it could be held liable for employment taxes for that worker.

Taxes for the self-employed contractor

An independent contractor is self-employed and must understand the tax filing requirements.

  • They carry on a trade or business as a sole proprietor and file a Schedule C to report business income and expenses.

  • They generally must pay self-employment tax (Social Security and Medicare tax) as well as income tax.

  • Self-employed individuals generally are required to pay estimated tax quarterly tax payments.

  • Self-employed taxpayers may claim business expenses as a deduction against their income.

Tax Reporting for You (the business owner)

When you pay an independent contractor over $600 in a calendar year, you must report the payments on Form 1099-NEC and file this form by January 31 following the tax year. The best practice is to get the contractor to complete Form W-9 before you pay them.

For your employees, you will issue Form W-2 and file quarterly payroll reports including Form 941, Form 940 and state payroll reports including paying unemployment insurance.


 

If you have questions about the considerations you should take into account when making the decision to outsource payroll, check out this previous article.

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