Should I Have Employees or Independent Contractors for My Business?

Should I Have Employees or Independent Contractors for My Business?

March 26, 2022
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 As more and more businesses move to hybrid or remote work models, owners and operators are often faced with the question of transferring job roles. As there is little an employer can control when the work is being done from a remote location like someone’s private home, it makes sense to change that job designation to an independent contractor instead of a recognized employee.

The only problem with this situation is understanding the tax implications. While we at Green Valley Tax Services always advise people to speak with a professional account or bookkeeper before making these kinds of changes, we have provided some valuable information that should help in your decision-making process. 

What is the Difference?

Whenever you go through the long-involved process of hiring or finding someone to complete a job, you have to classify their relationship to your business as either an employee or independent contractor. Employees will give you far more control over how the job is done, but you will be subject to more oversight. With independent contractors, you do not have to worry about anything other than payment, but you also have way less control. 

The IRS designates the difference pretty clearly using 5 factors: 

  1. Performance - Do you set a schedule or outline the job parameters clearly for your worker to follow? The more freedom a worker has to complete the agreed-upon job, the more likely they are to be an independent contractor. A pizza delivery boy with set hours who is told when and where to deliver is an employee. A freelance web designer is given a goal for the end of the project then let free to reach that goal anyway they feel reasonable is an independent contractor.
  2. Equipment - If you provide the tools, then they are your worker. If they provide their own equipment and expense that equipment often, they are contractors.
  3. Payment - If you issue a regular check or bank deposit set to predetermined hours or a salary, then they are an employee. If you pay based on a contract of lump sums or prearranged systematic payments based on workload, they are contractors.
  4. Benefits - Independent contractors rarely, if ever, receive employee benefits.
  5. Termination - If you can fire the worker any time you want, they are a worker. If there are contractual obligations, they are most likely a contractor. 

What This Means for Taxes

In general, paying an employee will result in more paperwork and responsibilities. Not only are you responsible for issuing a paycheck, paystub, or deposit notification, you are also on the line for withholding portions of their wages, paying the IRS on a regular basis, and paying your share of the employee’s employment taxes. You may also be required to pay additional compensation or unemployment obligations. 

As for independent contractors, you only pay a single sum or set of sums as arranged by the contract. There is no secondary payment unless it is written into the agreement. The lack of responsibility on your part is a driving reason why so many businesses are moving in this direction. Simply put, you have less liability. 

You do your due diligence and issue W-2s to employees at the end of the year. As for contractors, if they earn more than $600 from you, expect to fill out some forms. 

IRS Form W9 - You should always request this form be filled out by your contractor to have all the legal information about them when you report their payments to the IRS. This includes items like legal name, address, SSN/EIN, and more. 

IRS Form 1099 - At the end of the year, you can issue 1099 that informs the IRS how much the contractor was paid and any mitigating payment situations. 

Where to Get HelpYour workers will fall into the two categories of employee or independent contractor for the most part. Either way, you will need to report their earnings/payments so you can record that information on your own business taxes. 

The easiest way to ensure everything is reported correctly is to hire a professional company like Green Valley Tax Services. We have years of experience handling all kinds of employee and contractor situations and understand the paperwork required to keep you in good standing with the IRS. So reach out and give our expert team a call today