Most business owners require help from other individuals to successfully run their enterprise. Often times they find themselves needing hired help to keep their business running smoothly. Perhaps you find yourself in a similar situation; the question becomes, should you hire an employee or an independent contractor?
Sure, there are benefits to hiring subcontractors. It will save a company on payroll taxes, benefits, and insurance. Savings, though, must be weighed equally with risk. It’s been said, “you can call a shark a guppy, but that won’t stop him from biting you”. Similarly there can be serious and costly consequences to misclassifying a worker as a subcontractor when they are, according to the IRS definition, an employee.
What’s at stake? The IRS and state Department of Labor can assess major penalties on top of taxes they failed to withhold from the worker’s pay. In some cases, the IRS may subject an employer with misclassified employees to penalties which include 20% of all wages paid PLUS all of the Social Security and Medicare taxes which were never withheld from the employee’s pay. The individual responsible for collecting and paying these taxes can be held personally liable for any uncollected tax, even if the company folds or files for bankruptcy. If the IRS determines intentional misconduct or fraud an employer can face prison time and additional criminal penalties.
Clearly, this isn’t a subject to view lightly. Take the quiz below to determine if your new hire (or current worker) is a subcontractor or employee.
Who’s In Charge?
- Who determines when, where, and how work should be done?
a) I set the parameters for the worker to meet.
b) The worker determines the specifics regarding timing, location, and methods of work.
2. Is there a requirement for a set number of hours of work weekly or monthly?
a) Yes, I tell the worker how many hours (s)he is expected to work during a given period.
b) No, as long as the work gets done by the agreed upon deadline the worker is free to work as little or as much as (s)he chooses during a given period.
3. Does your expectation of work to be completed require full-time dedication from the worker?
a) Yes, the workload is significant and I expect the worker to give it priority.
b)No, the workload is not so great that (s)he does not have time to complete work for other businesses.
4. Is the worker free to advertise his or her expertise and services to the general public?
a) No, I expect exclusive access to work performed by this individual.
b) Of course! I would expect the worker to be looking for jobs beyond working for my business.
5. Is the relationship considered continual or only for a specific period or project?
a) Continual – I expect this worker to be regularly available to me for the foreseeable future.
b) Period or project based – I only call upon this worker when I have a specific need to be filled.
6. Do you provide training to the worker?
a) Yes, I provide training including refining his/her skills or methods of work.
b) No, I expect him/her to show up for the job fully trained and already knowledgeable regarding work that must be performed.
7. Do you control the specific method for completing an assignment?
a) Yes, we maintain a clear sequence or method for completing work that I expect the worker to follow.
b) No, as long as the work gets done (s)he is free to control his/her own procedures and methods.
Assistants & Other Workers
8. Is the worker free to engage others to perform services for the company?
a) No, I expect the individual to complete all of the tasks him/herself and (s)he is not authorized to delegate work to individuals outside of our organization.
b) Yes, I have no control over who the worker may hire to assist with completing the assignment.
9. If the worker does engage an assistant or additional worker, who pays those wages or fees?
a) I would; this would be an amount above the worker’s agreed upon pay.
b) The worker would; if (s)he decides to pay for assistance in completing the work it would have to come out of the money already being paid to him/her and this would be solely his/her responsibility.
Money & Materials
10. Are payments to the worker based on a period of time (hourly, monthly, weekly, etc.) or based on a contract or invoice by job or task?
a) Period of time – I pay the worker for hours worked or based on a specific time schedule.
b) Contract or invoice – the worker bills me per job or based on our agreed upon contract and I must pay according to the bill’s terms.
11. Do you provide any benefits to the worker?
a) Yes, I pay for some or all of the following: insurance, paid time off, auto mileage, or other “perks”.
b) No, I only pay the worker for tasks performed and offer no benefits.
12. Do you furnish the worker with tools and materials?
a) Yes, all that is required for the worker to complete the task is him/herself.
b) No, the worker must be prepared with everything necessary to get the job done.
How’d You Score?
Add up all of your As and all of your Bs. If you clearly have more As than Bs you have definitely hired an employee; if you clearly have more Bs than As you’ve engaged a subcontractor. If your As and Bs are too close to call you probably need to spend a little more time reviewing the specifics of your relationship with the worker to determine how best to classify him or her. The article found here from the IRS website may prove to be very helpful. If you’re still unsure we’re happy to help! E-mail us to set up a time when we can discuss the specifics of your situation.
Now – just knowing if you’ve hired an employee or subcontractor is great, but how do you handle each of these scenarios for taxes? Don’t worry we’ve got you covered! Contact us today to find out about our payroll and 1099 processing services.