Hiring a team is a big and important step as business owner. Making sure that you are classifying your team properly is even more important.

employee versus contractor which is right for me

The trend right now in online business in particular is to only use contractors and avoid the “complications” of employees. While I do think this is a good idea, you want to be careful not to push the boundaries too much and get yourself caught in debate with the IRS.

As many businesses grow the roles of their team members may change, grow, and enter new territory that changes the relationship.  A contractor is paid directly without any taxes withheld and issued a 1099 at the end of the year. An employee is put on payroll with all the taxes withheld and local employment laws followed.

When you are looking to hire a team member here are some core questions to ask:

  • Does this person work with other clients as a contractor?
  • Who dictates when and where the work is completed?
  • How many hours a week will this person be working for me?
  • Will this working relationship be for a set time period or ongoing?
  • Who pays for the tools needed to complete the tasks?

As you answer these questions you will see a trend towards either 1 or 2

  1. The contractor has a fair amount of autonomy to complete tasks and ability to work on a project basis and you are happy with that.
  2. You desire a higher level of control over the work and timing of the work being done and should consider switching to employees.

The other things to consider, as time progresses with a contractor, is whether they are a core member of your team?

Do you want to give more control and more incentive to prioritize working with you? You cannot dictate the hours that a contractor works, you cannot demand that your projects take priority over their other clients projects. 

Converting someone from contractor to employee can be a huge asset to your business because you do have more say in how things are done and are able to offer benefits like vacation pay, insurance, or retirement. These are not things to consider lightly, but if you look at the most successful businesses with longevity, they have employees and not just contractors. 

What if I am ready for employees?

If you are ready to move into developing a core team for your company then you will want to talk to an accounting professional to make sure that things are set-up properly before hiring anyone. You will need to register certain information with your state as well as setting up with a payroll software.

You may also want to talk to a lawyer or HR Consultant to make sure you have good policies and employment contracts in place. I highly recommend my friend Ashley over at www.sprouthr.co She also has some great templates for job descriptions and interview questions.

More information on 1099-misc

IRS Help article: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

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