Small business owners have a full HR plate with hiring, managing, and paying taxes and benefits for employees. Even if you have the capability to hire a full time human resources personnel to keep track of all employees, it can still be time consuming, as well as expensive, after all wages, taxes, and benefits are paid.
However, a small business owner can make a smart decision to hire independent contractors to perform work duties. What is an independent contractor? It is a worker who is considered to be in business for him or herself, also known as a freelancer, self-employed individual, or even a consultant.
Though independent contractors can perform the same work that a regular employee does, the big difference is in how you pay them, how they complete their work, and how you report the wages to the IRS.
Issues to Consider with Independent Contractors
While you are not required to pay income tax, Social Security tax, Medicare, or unemployment taxes for an independent contractor, do realize that if you inappropriately categorize an independent contractor who should be an employee, it could cost you in penalties. Here’s how you know the difference.
- Relationship – If the job is expected to continue indefinitely, the worker should be an employee. An independent contractor is expected to complete a specific job.
- Financial – Don’t try to control how an independent contractor is paid. They set their own fees, and are free to search for other clients.
- Job Control – An independent contractor should use his or her own tools and other resources, rather than the company’s equipment. Be sure that if you do allow an independent contractor to use your equipment, the employee-employer relationship is not met.
- Higher fees – Know also that hiring an independent contractor is likely to cost more in hourly wages than a regular employee. However, remember you do not have to pay taxes or benefits.
Benefits of an Independent Contractor
- Financial Savings – Though you may pay higher wages, ultimately you can save on your overall expenses when it comes to tax liability and paid benefits.
- Changing Job Demand – If you don’t need a full or even part time employee year round, an independent contractor can be beneficial when you need help the most during your peak seasons.
- Skilled Workers – Independent contractors are generally highly experienced and skilled to be operating as a freelancer or self-employed. Enjoy their experience to benefit your small business.
For small and large businesses alike, independent contractors can be a smart solution to your staffing needs, with their flexibility, ease of management, and affordability.