Guest post by Craig Calvin (learn more about Craig at the end of this post)
As the global economy grows weaker, Internet commerce is growing at a faster rate worldwide. Brick and mortar can take a big bite out of your company’s bottom line, but what is even more expensive for any company is its payroll and benefits packages. Employees usually make up about 50% of the cost to any business. Most online businesses are unique in that they do not need to have a storefront or even an office where employees show up every morning. That being the case, do online businesses even need employees?
We all want to save money on taxes and streamline our overhead. Your business is growing and it’s time to hire some help. This is a great opportunity to think it through and save some of your hard earned money. With some careful evaluation, you can legally keep your tab with Uncle Sam a little bit lower.
When considering hiring staff for your online business, one thing to take into consideration is whether it would be more advantageous to hire staff made up of independent contractors or traditional employees.
First, it is important to know the difference.
Before you rush off and boldly announce to your interviewee that they’ll be an Independent Contractor and you’re not paying tax on them, you need to know the legal definitions so you can work within them. The Internal Revenue Service has set solid guidelines that you must strictly adhere to lest you high tax penalties and back wages. The IRS changed these guidelines from twenty questions to just three characteristics:
(1) Behavioral Control: tests how much control the company has over a worker and how they get their job done. Will the worker be permitted to work at their own pace (within agreed time limit)? A good example of this would be a person hired to build a deck. You can agree about a timeframe that the work should be completed by, but the builder will work at their own pace, beginning and ending their day at their discretion and even hire someone to help if they feel it is necessary. Of course, they would pay that person directly.
(2) Financial Control: tests financial arrangement between company and worker, focusing on how the worker will get paid and if they are given tools to use or reimbursed for tools used to do their job. Using the same example as above, the builder would bring his own tools to build the deck and he would be paid for the completed project or by the hour, whichever you have decided. But the work will not be ongoing, when the job is completed so is the contract.
(3) Type of Relationship: tests if worker receives extra benefits, like health insurance or if the worker evaluated versus the work. Again, using the same example, the builder will not get a paid day off he is doesn’t come to work one day and he will not receive health insurance or a Christmas bonus.
These rules have been put in place in order to distinguish if a worker is an “employee” or “hired help” by determining the relationship between businesses and workers.
Positions that online companies normally staff such as programmers, designers, sales personnel, and customer service representatives are frequently filled by workers that can work independently, work with their own tools and come to with the necessary skills required to do the job, i.e. no on the job training needed. This makes the IRS three question guidelines easy to follow. While employees often come with all of the skills that they need, the business will have to provide the tools that they need to do their job every day.
Evaluate the benefits of hiring an independent contractor versus an employee.
One of the cons of working with independent contractors is that you have to let them set their own hours. This can be hard for some online businesses owners that like to have complete control of all aspects of their business. Another disadvantage is that you cannot pay them salary, therefore, you have to pay them time and a half for hours worked over time (unless you pay them by the job) if you enter a written contract you will have to honor the contract; if they are doing copyrighting work, you may not own the copyright unless you clearly state it in the contract. Also, you may be liable for their actions so make sure that you are insured against their actions and that they maintain their own liability insurance as well.
Some of the pros to hiring independent contractors are that it can assist a small business financially through considerable savings in tax dollars, employee benefits, tools/supplies, and they are not compensated for incomplete work. Timing of payment coincides with completion of the job, rather than in regular intervals. Additionally, many online businesses do not have a public office to work out of and independent contractors can work from anywhere. Paying someone who works from home by the piece, instead of the hour, eliminates the need to track hours. You’re not paying them when they switch a load of laundry or when a neighbor pops by to have a cup of coffee.
Another think to consider is that the worker will be responsible for their own self employment tax on this income, since no tax is withheld. This is a plus for you, but may seem as a drawback to them. This needs to be pointed out to them, and may be met with some resistance, so handle it delicately and openly.
Do Contractors Need to Get Paid More?
When your new part time Independent Contractor finds out that she’ll be paying her own taxes, she may ask to be paid more for the work; but you can still save some money. You want to price this difference; what you think you’re saving in taxes may be partially or entirely eaten up if you are paying more for the labor. Awareness will keep you from missing the forest for the trees.
With an employee, where they are guaranteed 40 hours a week, you will be comfortable with a lower hourly wage than what you’d pay an Independent Contractor for a job. For instance, a staff web designer may make $25 an hour as your employee, working 8 hours a day. But you may pay a designer $1000 for a design that takes her only 15 hours to complete.
Now consider this: the same logic can be used in reverse. Perhaps a full time employee that does some writing for you is questioning their hourly wage, when you just paid a writer $100 for a single article that may have taken 6 hours. You can point out that the Independent Contractor writer was not guaranteed steady 40 hour work every week, nor did they have benefits; also if the job ended up taking 12 hours, their pay would have been the same.
For the reason that online businesses live in the world of virtual reality, perhaps having your staff structured in the same way would be most beneficial. In this day and age, a company (even a large one) does not have to have four walls to be successful, nor does it have to have the high cost of permanent labor and all that comes with it. As with any business, it is up to the owner to decide what is right for them.
About the Author: Craig Calvin is Marketing Manager for http://www.sixsigmaonline.org , leader in online six sigma certification.
Traci Bell says
Some business owners choose to hire both, which can also be a wise decision and many people choose to be an independent contractor. You are absolutely right, a business owner must educate himself or herself about what exactly goes in to each.