One of the most challenging aspects of being a small business owner can be hiring, training, paying, and managing employees. Building your perfect team takes patience and hard work. It often means researching human resource policies, setting up payroll, starting a new project management routine (we love Trello!), and learning how to trust others with your big goals. There are a few ways to build your team and the rules set by the IRS are different depending on how you stack your bench.
In using the term ‘employee’ above, I am reference someone who is a W-2 employee. This is someone who performs tasks at your request, works when & where you instruct, and is trained according to your individual methods. Below, I share the difference between an employee & a 1099 Independent Contractor. When you hire a 1099 Contractor, your business is not liable for taxes, benefits, etc., which is often appealing to small businesses because when you hire a W-2 employee you are responsible for half of their FICA taxes as well as withholding and remitting federal and state taxes.
The difference is important to note as there are serious implications for mis-categorizing an employee including paying back taxes for as long as the individual has been working for you. Whether it’s web design, administrative assistance, social media or a second shooter, you have to be really careful and make sure you are not “hiring” that person as a 1099 contractor when they really should be a W-2 employee. The IRS regulates this and tells us all about the guidelines here.
There is a 20 Factor test the IRS does to determine if an individual is an employee or contractor. If you answer “yes” to any of these questions, you should be treating the individual as an employee and not a contractor.
- Are you instructing the individual on how to perform the tasks, where to work or what hours to work?
- Did you train the individual in accordance with your methods instead of allowing them to be the expert and use their own methods?
- Did you have to invest in equipment or products for the individual to complete their tasks?
- Are you the only employer the individual works for and they work at least 30 hours a week for you?
- Do you provide benefits such as insurance, vacation or sick pay?
- Did you provide a handbook to the individual instead of them supplying you with a contract outlining their services?
- Do you allow the individual to fill out a timesheet and turn in hours for each pay period instead of asking the individual to invoice you?
Do you have any questions regarding the difference between an employee and a contractor? If so, don’t hesitate to reach out!