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When Your Business Needs Staffing Help

By Joel Handelsman | June 29, 2012

Most successful small business owners will, at some point, need the help of additional workers. Deciding whether to hire an employee or to engage the services of an independent contractor is the first step. The specific business needs will play a large part in dictating which option is best.

A business owner who has an ongoing need for help, such as a salesperson, will probably choose to hire an employee. On the other hand, a business owner who needs his business premises painted would probably hire an independent contractor. In other circumstances, the right decision can be less clear.

A business owner's responsibilities vary greatly depending on whether a worker is an employee or an independent contractor. Most important are the rules relating to employment verification and payroll taxes. A business owner has several responsibilities with respect to employees that don't apply to independent contractors.

In contrast, a business owner who hires an independent contractor has no responsibility to verify that the person is eligible to work in the U.S. Additionally, the contractor, and not the business owner, is responsible for the payment of all employment taxes. For this reason, many small business owners would prefer, if possible, to deal only with independent contractors to avoid the bookkeeping and other compliance activities required when the business has employees.

The IRS recently offered some advice on the employer versus independent contractor issue. As you might expect, the IRS has the final say on the matter. Complying with the eligibility verification requirements is a one-time event for each employee, but withholding, accounting for, and remitting taxes to the IRS is ongoing.

Here are seven things every small business owner should know about hiring people as employees or as independent contractors.

  • The IRS examines three characteristics of the relationship to classify workers:
    • Behavioral Control: the right to direct or control how the work is done.
    • Financial Control: the right to direct or control the financial and business aspects of the worker's job.
    • Type of Relationship: how the workers and the business owner perceive their relationship.
  • If the owner has the right to control what and how work is performed, the worker is most likely an employee.
  • If the worker controls the means and methods of accomplishing the work, he or she is most likely an independent contractor.
  • Misclassifying workers as independent contractors can create substantial tax bills, as well as penalties for failing to pay employment taxes and for failing to file required tax forms.
  • Workers can avoid higher tax bills and lost benefits if they know their proper status.
  • Both business owners and workers can ask the IRS to rule on their employment status, using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
  • The IRS makes available numerous publications to provide guidance on making the correct call with respect to a worker's status.

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