One of the biggest questions that I receive from clients is how to classify employees. With each set of classifications – exempt, nonexempt, contractor – comes a new set of rules. This causes many employers to stick with what they know – hiring employees. In this new economy, employers are rethinking their strategies for aligning talent with their strategic goals.
The FLSA (Fair Standard Labor Act) has guidelines that legislate whether an employee is a '1099 Contractor' or an 'Employee'.
Here are some questions to think about in determining whether your relationship is a Contractor (1099) or an Employee (W2):
1. Does the employee make his/her own hours?
2. How/when is the employee paid? Who set the rate amount?
3. Do your employees only work for you? Or do they have several employers?
4. What tools do you give the employee to do his/her job?
5. What is the permanency of the relationship? Do you have an ongoing relationship? or is it project based?
The less ‘control’ you have over the employee in these areas, the more likely the possibility that person could be a Contractor.
Getting Giggy with It
But why would you want to hire a Contractor anyway? Or why should you participate in this newly branded ‘Gig Economy’?
1. Cost & Expertise. The best way to get top talent for a fraction of the cost is to hire a contractor. Cost may prohibit you from having a top Financial Controller sitting in the office next to you. If you hire a Contractor (particularly if you are small), you can have a Controller that can fluctuate his or her level of service to the needs and budget of your business.
Costs go beyond salary. Contractors don’t require insurance, bonus, 401K contribution, payroll taxes, training, or beer on tap in the company breakroom. Check out this calculator which will calculate the cost of Employees vs Contractor in this amazing article.
2. Size of Project. If a project is definitive or the expertise is only needed for a limited time, a Contractor is a clear choice. There are some amazing technical professionals who have hopped on the Gig Economy train waiting for your business. This is especially true when adding a new department or product to your business. Talent usually comes in two categories: ‘builders’ and ‘maintainers’. The person you hire to build your business is often not the person who you will want to maintain it (they get crabby and bored). I suggest a contractor build and an employee to maintain in many cases.
3. But I hate paperwork. Early in my consulting career, I had an HR Director tell me to go to a temporary office and register so that they didn’t have to go through the process of hiring a contract employee. This cost the company 20% more – but felt it was worth the hassle. Let me tell you, the paperwork for hiring a contractor is easy. The contractor takes on the burden of most of the paperwork including sending you a monthly invoice. If you spend more than $600, it is required that you fill out a 1099 form. Fill the name and address of you and your contractor. And under box 7 – put how much you paid them through the course of the year. Send to the contractor by January 31 and incorporate in your taxes by April 2. Personally, I think that is a heck of a lot easier than the paperwork required for an employee including W2, I9, job application, and state tax forms!
I am not tax consultant and am a little sorry for the snoozer of an article. I love helping businesses achieve goals through talent. Of course, consult an attorney or financial professional before making major changes in your business. Thinking outside of the box (particularly box 7 of the 1099) could be the solution you need to grow your business.
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