When and How to Hire
Do you already have employees or contractors? Are you looking to hire? Or, is this something you’re interested in for the future of your business?
If so, keep reading!
First off, regardless of where you are in this process, CONGRATS to you! This means your business is growing! Choosing whether to hire employees versus contractors can be a difficult task, so I’m here to put your mind at ease and hopefully give you some clarity.
Defining the Two
Employee: An employee is someone who is put on payroll, which means that you are paying them a set amount of money on a consistent timeline, whether that be weekly, twice a month, once a month, etc.
Social security, medicare, and unemployment taxes are withheld from these checks, meaning taxes are already deducted out of your employee’s paychecks, and they get to keep 100% of that check.
Having someone on payroll also means that you, as the employer, are required to file a number of tax forms every pay period and every quarter, as well as annual forms. With payroll, you have very strict deadlines and it’s crucial that you meet those for multiple reasons, one of the major ones being staying in compliance with the IRS.
Contractor: On the other hand, paying a contractor means that you are paying an individual or a business for a service. When you pay them is up to you, there’s no strict schedule for you to follow, you can pay them by the job or by the hour… As you can tell, it’s a lot more flexible.
The main difference between the two, and this is very important to know (and is coming straight from the IRS website, linked here), is that:
Someone is considered an “independent contractor if the payer has the right to control or direct only the result of the work, not what will be or how it will be done.”
I’ll give you the perfect example: When I first decided to hire, I needed someone to work for me every single week for a set amount of time, and I needed them to complete a set amount of tasks each month. I wanted someone who would stick with me for years, we would do monthly check-ins, and I would pay them by the hour. I also wanted to consider possibly having them go full time so that I could scale back my hours when I started growing my family.
This is the perfect description of needing to hire an employee. I now have 3 employees and they do work for me that I oversee on a weekly basis.
However, I have two occasional contractors as well. Every now and then, I need help with my business management software or a cleanup project that I’ve taken on. I pay these contractors by the job for a one time fee to go in and perform a service on their own time, whenever they want, just as long as it’s completed by a certain date.
With contractors, I am not obligated to continue to employ them on a weekly basis. It’s strictly by project and completed on their own terms.
Two very different things now that I’m explaining it, right?
If you do not take away anything from this blog, hear me when I say this: Just because the contractors route is the simplest, doesn’t mean you can pick it and get away with it. If you’re paying someone as a contractor, but in reality they need to be an employee, trust me when I say the IRS will eventually catch you.
It’s also not fair to your contractor as well because if you’re paying them like an employee, and very frequently, they’re going to owe a whole bunch in taxes because no taxes are deducted from their paycheck.
The best and smartest thing you can do is consult with your CPA first, because sometimes it can be hard to decide which one is best to go with. You can also visit this link here for a comparison between the two.
Ok! Now that you’ve decided how you want to hire, what’s next? What are the tax requirements and what are their due dates?
Click below to enroll in my Cash & Creatives course, a DIY bookkeeping course that goes into detail in Module 4 about the tax requirements for hiring employees and contractors!