Hiring Employee’s Vs. Contract Labor PART 2
In part one of this article, we discussed the ins and outs of hiring an employee. Needless to say it is evident that becoming an employer may double the amount of paperwork you have. From payroll records, withholding income, social security, Medicare and state taxes, and unemployment taxes, to workers’ compensation insurance, and year end earnings statements. If just the thought of the extra work gives you a headache, you may want to consider hiring contract labor.
The first thing to keep in mind is that there are rules and regulations on what makes a person an employee or a contractor. Simply saying that you are going to pay someone for work and that you are not going to be responsible for the many taxes, withholdings, and filings that are involved in being an employer is not enough. It also doesn’t help to hire someone and call them a contractor. No matter what you call the person you hire, the IRS will likely consider a person your employee and not an independent contractor if he or she uses your tools, materials or equipment, receives on the job training, is obligated to work the hours that you set, is told not just what must be done but how the work should be done, receives health insurance, hires or supervises your workers, gets a regular paycheck, or can quit any time without incurring liability. Another important thing the IRS looks at is if you file a 1099 MISC form.
Before considering a contractor, you must carefully determine the legality of whether the hired person is truly a contractor or would be considered an employee depending on how you plan to use that hired help. If you don’t follow the law when it comes to hiring employees vs. contractors, you can be subject to back taxes and penalties and even worse, if the person is injured on the job and determined to be an employee by all legal purposes, you could find yourself with medical bills and a large lawsuit.
Once you have determined that the position you have open can be filled with a contractor and you find a suitable person, you need to be absolutely certain he or she knows the arrangement. That he or she is not your employee and that he considers himself self-employed. He needs to understand that he is not eligible for sick leave, he is not covered under workers compensation, and that he is responsible for his own taxes and insurance and that there will be no unemployment when the job is complete.
The good thing about using Independent Contractors is that the fee you pay them is your only expense. All you need to do is file an IRS form MISC-1099 (Miscellaneous Income). And if the contractor you hire happens to be “Incorporated”, you can hire them without having to file any forms, since the contractor is not your employee and does not come under the independent contractor rules because he is an employee of his own corporation.
As you can see, there are many advantages to hiring an independent contractor; from the smaller administrative workload, to and easier financial arrangement. But make sure that you get a written agreement with any independent contractor to define your relationship with the contractor for the IRS and for your protection. You should define the work that is to be done and clearly state that the contractor is responsible for paying self-employment taxes. You can put in the contract, the start and stop dates but not the working hours, you can include payment depending on results but not the amount of time spent on them. Many employers find that contracting is the best way to go.