The Tax Lowdown: Keep it Casual or Go the Extra Mile?
Haven’t started thinking about Tax season? Better get started! Taxes are due April 15th so for all your procrastinators our there, we thought it’d be a good time to go through a few common tax-related topics that could come in handy for your small business. First let’s look at W2 employees versus 1099 Independent Contractors.
More and more businesses are relying on freelance work, or 1099 Independent Contractors, to get things done. Despite the fact that freelance work is on the rise and seems simpler on the front end, it’s important to consider all of your options before opting to hire a freelance worker to handle certain roles.
Freelancers are perfect for specific jobs or projects that require a very specific skillset that fall somewhere on the outside of the normal type of work you or your business does. If this project has a clear end date or a completion time, a freelancer is the way to go. This also goes for jobs that do recur, but only take up a few hours in a typical week.
Freelancers are also cheaper.
When you hire a freelancer, the bottom-line cost to your business is usually equivalent to what you’re paying them. No need to worry about their benefits, and also no need to worry about finding work for them to do. If they only work for five minutes one week, they’ll only get paid for five minutes of work.
When you hire a regular W2 employee, there is automatically a greater cost to your business. Taxes and compensation need to be automatically taken from their pay, plus they’re going to be entitled to at least have access to benefits, even if they’re only working on a part time basis. This likely means you’re going to need to have a payroll processor.
It’s at this point that we reach a sort of crossroads when it comes to freelancers versus regular W2 employees. If you are reliant on a particular employee to complete certain tasks for a while, only paying them as an independent contractor, by nature, says that you aren’t committing to this person long-term - which means the person likely won’t be committing to your business long-term either! A regular employee is under your control entirely.
You don’t want to cost yourself extra money by hiring a regular employee with a W2 that you only need to do a small or limited task.
At the same time, you could leave yourself vulnerable by relying too much on the work of a freelancer.
Plus, the IRS does not take kindly to your business misidentifying employees! There are plenty of fines and other nasty things they can do to you and your business if they feel you’re trying to get away with something by using 1099s when W2s would be more appropriate!
In this vein, hiring can sort of be like dating, with 1099s being a casual relationship, with a regular W2 employee representing a serious, committed relationship.
1099s can help to supplement your business and can help to manage tasks and responsibilities that are leaving your plate, or the plates of your regular employees too full. But, 1099 employees will not help your business grows. Ultimately, regular employees are the people who you want to build your team with.