When they succeed, small businesses sometimes get to a point where they are getting more projects than they or their immediate family could handle. It is a double-edged sword; although plenty of work is coming in, the worker might spread himself too thin and burn out. In this case, the best solution is getting outside help.
After deciding that they need to hire someone, though, the next thing a prospective employer must do is decide if they are hiring someone as a 1099 contractor or a W2 employee. If you are getting an employee for the first time, here are some things to know about either designation.
Why you should mind the designation
As a rule, the IRS views all helpers under the direct control of a business as employees. They do this because it is easier for them to collect taxes from a single source than several independent workers. Be careful with these designations; if you pay a helper as a 1099 contractor and the IRS later determines them as W2 employees, you will have to pay federal income tax, social security, and Medicare taxes for your helper.
If you have a contractor, you do not have the right to control the result of their work. You are paying for the results of their work and not how they arrive at their product. For example, suppose you hire an electrician for a complex project at a rate of $16 per hour. Even if your contractor finishes before or after the 400-hour target, they will still get $6,400 as payment.
What determines if someone is a 1099 or W2 worker?
When determining if a worker is a contractor or an employee, you need to consider several markers. First, does the company control the worker’s actions or how he does his job? If not, he is not an employee.
Next, consider the financial aspect. Is the employer responsible for providing tools or supplies to the worker? What types of expenses do they reimburse, if any? Finally, look at the type of relationship the worker has with the payer. Do they have written contracts that stipulate their title in the organization, their work hours, and other requirements that employers might stipulate? Does the worker have employee-type bonuses like vacation pay, insurance, a contribution to a retirement plan, or similar benefits? If things are still unclear to you, refer to your employee payroll services provider. They will know how to designate workers.
When determining if a worker is an independent contractor or an employee, businesses must weigh factors like these. There is no set number of factors, no “magic rule” that automatically determines which workers are employees or contractors. In some cases, benefits might prove that there is an employer-employee relationship. In others, the scope of responsibilities is what makes a person contractual. In any case, you need to get the particulars right, so the IRS does not come after you in the future.
Getting your employees’ designation is a vital part of running a trustworthy business. If you want clients to bring you their business, you need to convey efficiency and reliability in everything. That includes how you deal with your employees and other people who work for you.
If human resources management is not part of your wheelhouse, let A4E take care of it for you. We are accountants for entrepreneurs in Boston, Massachusetts, helping small businesses and solopreneurs with done-for-you bookkeeping, taxes and CFO solutions. Schedule your free consultation today to learn more!
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