As your small business grows, you will find that you aren't able to do everything on your own. To secure the help you need, options include outsourcing tasks to independent contractors or hiring employees to whom you delegate work.
In order to arrive at the decision which will make the most sense for your company, it's important to first understand some of the key differences between working with independent contractors versus having employees on staff. You may have heard someone refer to a contract worker as a 1099 employee.
This is because a business is required to send the federal 1099 form to contract workers as opposed to the traditional W-2's sent to employees at year end. According to IRS regulations it's important that business owners correctly determine whether the individuals providing services are employees or independent contractors.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker. See Internal Revenue Code Section 3509 for more information.
Employees vs contractors
Independent contractors who perform work for your business operate under their own business names. They are not on your payroll, and they will issue you invoices for their services rendered typically based on an agreed upon flat fee or a per hour rate. With employees, you provide regularly scheduled paychecks that reflect compensation according to the salary or wages you agreed to pay the employees.
• Tax withholdings
With hired employees, you withhold their federal, state, and local taxes from their paychecks. You are also responsible for submitting the federal and state tax payments to the appropriate tax authorities. Independent contractors, on the other hand, must submit their own federal, state, and local income tax payments including self-employment taxes (Social Security and Medicare/Medicaid) directly to the tax authorities.
• Company benefits
When you have employees, you may be required by law to provide certain benefits, such as offering medical insurance, paying the matching portion of each employee's Social Security, their Medicare tax obligation, workers' compensation insurance, and family & medical leave. You are not, however, required to provide these types of benefits to independent contractors.
• Management of work
With employees, you have more control over how work is done, when it's done, and where it's done. With independent contractors, you can't dictate their hours, the equipment they use to perform their work, or tell them how to do their work.
Which to choose?
That depends. Using independent contractors might save you some money on labor costs, minimize liability, and provide your business more flexibility if you choose to discontinue your working relationships. On the other hand, hiring staff gives you more control over the skills development of your employees and you advise employees on how, when, and where work is performed.
If you choose to sign on independent contractors to help you with your work, make sure it's clear they are not employees. Consider having them sign an independent contractor (Work for Hire) agreement, and request they sign a W-9 (Request for Taxpayer Identification Number and Certification) form to identify them as a contractor.
• Fox Valley SCORE provides free confidential mentoring to clients in 17 locations throughout DeKalb, DuPage, Kane, Kendall, McHenry and Will counties. If you need help with existing business challenges, or are thinking about starting a new business, visit our website and click on the blue bar "Book a Mentoring Session." Click on "Take a Workshop" gray bar to register for one of the many free workshops during the year. The website is foxvalley.score.org.