Today, we are talking all how to hire someone onto your team the right way. As small business owners, entrepreneurs, and creatives, we need help managing our businesses as we grow! At a certain point, it just isn’t possible to get all the work done by yourself. And, when hiring help, the biggest dilemma you will face is: should I hire individuals as independent contractors or employees? This is one of the biggest questions I get on my Instagram and Legal Paige private Facebook community. I thought it was time to do an official podcast episode on this topic to get you all the information you need!! Make sure to tune in and listen carefully to the differences between these two worker designations because it could cost you and turn into a huge headache with the IRS if you aren’t handling your workers correctly. Are you ready? Let’s do this!
In this episode we talked about:
- The differences and importance of identifying Independent Contractors (Freelancers/W9 Land) and Employees (W2 Land),
- Financial differences of Contractors vs Employees. Who pays for what and who is responsible for what expense as a worker and what taxes are needed to be accounted for. What are FICA taxes?
- Employment Law Differences: Employees are covered by a number of federal and state labor laws, whereas contractors are not covered by any employment or labor laws. Who has insurance and who doesn’t?
- Reporting Requirements for Employees and Contractors. Who reports to a W2 and who reports on a 1099 form and when and how this pertains to the IRS.
- Unemployment Insurance: Business owners need to report state and federal unemployment insurance for employees, but business owners have no obligation to do so for contractors. What the Futa tax is and when it is applied.
- Necessary Contracts and Agreements for Employees and Contractors.
- Noncompetes vs Non-solicitation clauses. Who has control over who you work for (competitors), what confidentialities are in place, and what you can do as a worker.
- The benefits of hiring an Employee rather than an Independent Contractor.
- Some valuable questions: Does your business control or have the right to control what the worker does and how the worker does the job? Does your business control the business aspects of this person’s job? Is there a written contract or employee benefits such as a pension plan, insurance or PTO slash vacation pay? Will the relationship continue and is the work a key aspect of your business?
Here’s a few quotes that we thought were awesome:
[3:06] “An independent contractor is essentially someone who runs their own business or is working under their social security number.”
[4:30] “You as the employer are required to determine their gross earnings, whether that’s weekly, biweekly or monthly. And then you take out deductions from their gross pay amount such as a federal income tax withholdings, social security tax withholdings, Medicare withholdings, state income tax withholdings, and potential other tax withholdings if they have those in their local taxes or county taxes.”
[6:24] “…financially it is more expensive to hire an employee.”
[9:31] [Contractors] “…they have to send you an invoice for their services. You should not be sending them a check every month or paying direct deposit without the invoice from that specific contractor.”
[10:47] “Employees are covered by a number of federal and state labor laws, whereas contractors are not covered by any employment or labor laws. Thus employers must pay into the Worker’s Compensation Fund and unemployment insurance and then the employees that they hire are covered with these benefits and essentially they are insured on the job working for you.”
[12:00] “Employers must report all money paid to the employee during their tax year on a W2, but for contractors, employers must report payments of over $600 or more in a calendar year on a form 1099.”
[14:08] [Futa Tax] “It requires employers to include unemployment insurance payments to both state and federal governments in their payroll taxes for all their employees.”
[21:05] “Noncompete clauses and contracts are restrictions that control this employee or contractor is future ability to work for competitors of you as the employer.”
[28:54] “You need to ensure that you aren’t controlling the contractor’s schedule and their ability to say no. They must truly be independent.”
Links Mentioned On Our Show:
[As a reminder, I am legally obligated to give my disclaimer. I am an attorney, but I am not YOUR attorney. All legal information I talk about in this episode is indented for the masses and a large variety of different businesses. I am only your attorney when you hire me and we sign an engagement letter for me to specifically work on your legal issues. Please feel free to seek out another attorney in your home town if you need specific legal advice or contact me for information.]