As your business grows you may be inclined to hire people to help with the workload.
From there, the question is do you have an independent contractor (1099) or an employee (W2)? Like most things in the tax code, the answer is, it depends.
The preference for many businesses is to have contractors. This is for two main reasons; Running payroll is an administrative hassle and it is more costly because of the matching portion of Social Security and Medicare taxes.
Let me dispel the most common hiring myth: “If I only hire them part time, then I will just treat them as an independent contractor.”
Wrong. The time the person works for you is not a relevant factor in determining employee vs. contractor status, but instead, the degree of control over the individual and their independence.
Degree of control and independence fall into three categories:
Behavioral: Does the employer control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the employer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies)
Type of Relationship: Are there written contracts or employee-type benefits (insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
You as the employer have to weigh all facts and circumstances and determine the status from there.
Here are some general thoughts:
- If you require the individual to be at your office certain hours, control the direction of how tasks are to be completed, and have him/her utilizing your office equipment, well, you probably have an employee.
- If the person works remotely using his own equipment, has the latitude to accomplish tasks as he sees fit, and also has the right to turn down certain assignments and accept others, well, you probably have a contractor.
- Employers who misclassify workers as independent contractors can face substantial tax bills and penalties for failing to file required tax forms and failure to pay employment taxes.
- This is a complex issue and IRS hot button. Consult with your tax advisor when ready to hire.
John Stanfield is the managing principal of Stanfield & Associates LLC. He is a tax and financial expert that can provide valuable and helpful tax tips and tax advice for both individuals and small business owners. John holds a Masters Degree in Accountancy from DePaul University and is a licensed Certified Public Accountant in Illinois. He is also a member of the American Institute of Certified Public Accountants and the Illinois State CPA Society. Follow @StanfieldCPA on Twitter and join the conversation at facebook.com/StanfieldCPA.