For many business owners, the decision between employees and contractors is highly debated. Whether you started a cleaning company, plumbing business, or pet salon, how you choose to classify your staff has many implications – from taxations to overall company policy. The IRS has outlined a list of rules to help you correctly classify your workers and avoid penalties. Below, we discuss five (5) major considerations and the implications of each to help you decide which worker classification is best for you and your business.
1. Contractors are more affordable. Employees offer more flexibility
2. Misclassifying workers can lead to monetary and legal consequences for your business
3. If your decide to hire employees, make sure you invest in HR resources, including people and software, to track employees benefits, taxes, and payroll
Five (5) Major Considerations to Think of When Deciding Which Worker Classification is the Right Option for your Business:
1. Payroll, Taxes, and Benefits
Employees are on the business’ payroll and are paid hourly wages or a salary. Employers are required to withhold mandatory payroll and income taxes to comply with IRS guidelines. In addition, an employer also pays employee benefits, including health insurance, retirement programs, paid vacation, sick pay, commuter benefits, etc. that can often sum to one-third (1/3) of the employee’s total compensation package.
On the other hand, contractors are simply paid a fee for their service. Contractors are responsible for paying their own taxes and benefits plans independently.
2. Onboarding Procedures, Training, and Evaluations
As part of an employer’s commitment to their clients, employers invest in detailed onboarding procedures and ongoing training to ensure employees are well versed in the company’s systems and ways of working. Systems of evaluation are also often setup to develop employees and continually improve the service quality.
Conversely, contractors do not undergo detailed onboarding procedures and ongoing training. Contractors use their own methods and any evaluation performed are for the business’ own recordkeeping to measure service quality and are not a means of worker evaluation i.e. should you hire this contractor again or not?
3. Company Dress Code & Codes of Conduct
Excited about the cute employee uniforms you just ordered? We’re sure they look great! However, remember they are for employees. Contractors are not required to wear company uniforms or follow designed dress codes. Any indication to enforce this can put your business at odds with the IRS. The same holds true for company specific codes of conduct.
4. Work Related Expenses & Reimbursement Policies
Employees are often reimbursed for travel expenses and any tools required to complete the job are provided by the employer. Contractors, on the other hand, are not reimbursed for travel expenses and utilize their own tools to complete the assigned task. Contractors, however, may negotiate a favorable rate upfront that provides coverage for these expenses.
5. Your Hiring Goals & Worker Flexibility
Employees are typically more long-term workers and are dedicated to one company, subject to the rules and obligations set forth by that company. A contractor, on the other hand, has the flexibility to work for multiple companies and, without advance notice, may not always be available at the time you require.
Ultimately, the choice is yours. The defining criteria should be based on what’s important to you and your business. While some customers hire contractors for the affordability and reduced compliance, others hire employees to control each aspect of the service experience provided to their customers. Those in the middle, hire sufficient employees to handle regular service volumes and contractors to take care of the surplus. Whichever classification you choose for your workers, do ensure that you are compliant with IRS guidelines. A simple contract stating a worker’s classification is not enough.