Hire an Employee or Use an Independent Contractor?
Small business owners often need someone to help them with specific tasks. These tasks may range in scope from designing a brochure to writing product descriptions or answering telephones part-time. What is typically challenging for many small business owners is the additional burden of hiring someone on a full-time basis for part-time tasks. This is when it becomes necessary to make a decision between hring an employee and using an independent contractor.
Business hiring decisions
Small business owners often find that the cost of hiring a full-time or part-time employee is costly and often creates more paperwork than is warranted. This may be when it is time to consider an independent contractor. However, it is important to note the IRS rules that apply to independent contractors before you do so.
The IRS offers three basic rules that separate an employee from an independent contractor. They are:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?”
If the tasks that you need to have accomplished can be done by an outside worker and these questions can be answered in the negative when the tasks are accomplished, you can use the services of an independent contractor versus hiring an employee.
The impact on your taxes
When you hire an independent contractor, you deduct the expenses associated with paying them from your taxes by reporting the income to the IRS and the contractor on a Form 1099. As a small business owner, you have no obligation to withhold any type of taxes, the contractor is responsible for taxes on their own.
There are many instances where it is more beneficial for a small business owner to outsource work to an independent contractor. Overall it saves paperwork, you need not provide equipment or supplies and you do not have to withhold taxes. In many cases, the services of an independent contractor will be a more cost effective option.
TAX ADVICE DISCLAIMER: In accordance with IRS Circular 230, any tax advice included in this communication, including attachments, is not intended or written to be used, and cannot be used by you or any other person or entity, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions, nor may any such advice be used to promote, market or recommend to another party any transaction or matter addressed within this communication. If you would like such advice, please contact us.