Hiring employees can be a daunting task for a small business owner. Especially for a startup that is hiring their first employee. The decision to take on employees is a daunting task and should not be taken on lightly. Whether to hire an employee or a 1099 independent contractor depends upon a number of factors including your business, the industry you operate in, and the work that is needed to be done. There are very important legal distinctions between the two types of hires and it is important to get this decision right. Here are several things to consider the next time your business is thinking about hiring.
What are the Differences Between an Employee and a Contractor?
The major difference between an employee and an independent contractor is the level of control the employer has over the worker. When a business hires an employee, they have total control over how, when, and where the employee performs their job. With an independent contractor the employer only has control over the finished product the contractor has been hired to complete. When a business hires a contractor, the business is paying the contractor to perform a specific service for the business on their own time using their own resources. In addition to being on their own time, an independent contractor is responsible for declaring taxes on their own personal income.
When it comes to hiring an employee, the business is responsible for taking care of an enormous amount of paper work. This is especially difficult for startups who are hiring their first employee. Once the first employee is hired, it becomes more easy to deal with the paperwork as you hire more employees.
Employees are a little bit of a safer way to protect your business because when it comes to contractors each state has their own rules and regulations when it comes to interacting with those types of employees. In some states, some types of contractors are considered employees and must be covered by workers compensation insurance. There are other states where this is not the case. Also, if a business is caught interacting with a contractor in a fashion that is meant for an employee there may be fines and other penalties for the business.
When Should a Business Consider Hiring an Employee
A business should consider hiring a person as an employee when the work really required the supervision of someone within the business. Hiring an employee is also best when you as the business owner want to control the work hours, the tools used, and the way those tools are used. Employees are better when the work that is required is long-term or ongoing and when the work is essential to your business.
When Should a Business Consider Hiring a Contractor
A business should consider hiring a contractor when the work is not central to the business, the work can be done by a professional who does not need much supervision, or when the work is a short-term project.
Do Not Hire Employees Until Your Making a Profit
Employees are much more of a long term decision. If your business depends upon the income of one or a few companies, the loss of one of those customers can have a drastic impact on your business. If one of these customers leave your business shortly after you have added staff, it can be a substantial problem for your business. If your business is not stable and making a sustained profit, it may be a better time to partner with contractors until the business is more stable.
Communicate with all Contractors
The legal definition with a contractor is that the business gives them a task to accomplish, but the business cannot dictate how the employee goes about getting the task accomplished. This does not mean the business should have little to no contact with the contractor. It is important to communicate with the contractor about the actions of the business and the employees they may come in contact with. If the quality of their work is exceptional or not up to par, communicate the thoughts to them on a regular basis. No matter what type of contractor you are using, open lines of communication will make all work much more smooth.
Classify Employees or Contractors Properly
Each state has their own rules and regulations determining how you should classify contractors and employees. Some states have rules where some contractors are considered employees for taxes purposes and within the workers compensation system. It is important to partner with an experienced independent agent and to investigate with the proper governing body yourself. Your independent agent can advise about the proper classification for each individual type of employee, but they can only act upon the information you give them. No one knows your business as well as you do and no one is responsible for the actions of a business more than the owner of that business. Nowhere is this more evident than when it comes to hiring contractors and employees.