Small Businesses Need to Consider Carefully Between Two Basic Hiring Options

You may have just recently opened the doors to your new business, and funds are still tight. But, if you want to grow your business, you might need more hands sooner rather than later. Unless you can gain real value from interns or volunteers, you basically have two options:

  • Hire permanent W-2 employees, full- or part-time
  • Seek help as you need it from contractors

Each option has its own advantages and disadvantages, and you could face tax or other legal penalties if you do not understand how the law fits into your decision. Here are some basic concepts that can help you choose wisely.employee vs contractor

Independent Contractors Provide As-Needed Help, with Some Caveats

Good contractors typically have specialized skills, knowledge and experience that let them hit the ground running with little or no training. You may pay higher hourly rates for their expertise, but, you often realize significant savings simply because you only pay a contractual rate for help when you need it while avoiding paying for benefits and employment taxes.

You can expect fewer office expenses as well since you don’t need to maintain full-time office space and equipment for contractors, who may even work off-site altogether. And, don’t forget that contractors don’t expect to be there forever; you won’t face the expense or strife of layoffs during slow times within your company.

Of course, when you hire contractors, you are the client, but not truly the boss. Don’t expect loyalty, don’t presume a full level of control and don’t count on bringing the same contractor back the next time that you need help. Also, understand that federal and state definitions of Independent Contractor do not necessarily match, and they can be confusing. Since employees typically bring more money than contractors bring to government entities, you can face audits or penalties if you make incorrect assumptions.

Hiring Employees Builds a Team, If You Can Afford it

Teamwork can be a major component to the success of small businesses. Each member of your team contributes more than just a specifically-defined job well-done. A small workforce typically forms a strong sense of community between members — and company spirit as well.

Where you have full control over the employees you hire, you may meet contractors for the first time when they arrive to start work. They may do exactly the job you need, but if you’re looking for someone who comes up with unique ideas or participates in the company culture, you may be disappointed.

Of course, employees require more time-consuming management activities than basic supervision of their work. They expect a level of employer support, which can include developing a plan for their future growth, free lunches and outings to help the team connect and motivators ranging from bonuses and contests to interesting new projects.

Finally, keep in mind that, even if you hire some part-time employees to reduce costs, you still may have to provide certain statutory benefits, such as workers’ compensation, unemployment compensation and anything required by state law. And, you must meet health insurance requirements prescribed by federal law from the Affordable Care Act or whatever legislation replaces it. For a good overview of benefits choices, check out this informative article about part-time employee benefits from Paychex, a leading provider of payroll, human resource and other services.

You Face Serious Tax Implications by Making an Incorrect Determination

It’s difficult to over-stress the complexity of correctly defining the status of individuals who do work for you. The IRS page on Independent Contractor (Self-Employed) or Employee? contains links to the following five definitions:

  • Independent contractor
  • Common-law employee
  • Statutory employee
  • Statutory nonemployee
  • Government worker

Each of these definitions requires you to make a sometimes-subjective assessment, such as might be required when defining what substantial portion means when deciding how much of a person’s work is for the benefit of your company.

If the IRS decides that you classified a W-2 employee as a contractor, things can get sticky. At the very least, expect them to require you to make up all withholding payments that you missed, possibly along with interest and penalties. And, if the IRS believes that your mis-classification was willful, don’t be surprised if the percentage of future W-2 withholding requirements for all employees doubles as well, as explained in section 3509 (b) in Title 26 of the Internal Revenue Code.

Don’t Let Savings Alone Determine your Hiring Choices

As a small business owner, you undoubtedly factor your budget into every decision, and bringing in new workers is certainly no exception. But number crunching alone does not convey the full value of each new hire.

Assuming that you have already investigated the legal considerations, contractors may be the perfect choice when you need someone to perform occasional one-time tasks. W-2 employees who are not always busy can generate excessive hiring expenses that do not always make sense.

But, take the time to consider your long-term needs. A loyal W-2 employee who is a true team member can bring great ideas and enthusiasm into the mix. You can’t put these qualities into a spreadsheet, but they can still translate into greater profits and growth for your business.

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