Running a small business isn't easy. It takes a lot of time, effort and planning – strategic planning at that. Every single business-related decision could spell doom for the business if not made with care. This includes deciding whether to hire a full-time employee or an independent contractor. Each business will be different, so it is up to you as the owner to decide which one works best for your business. Here are a few pros and cons to consider as you begin to make the choice of whether to hire an independent contractor or not:
Pro: Provides More Flexibility
Some businesses do not have consistent income all year, such as landscaping businesses and Christmas tree farms. However, during the busy season, it is possible to need an extra set of hands at work. Therefore, an independent contractor is a suitable option. These individuals work on short-term projects and can be let go as needed. Sometimes, independent contractors are hired on a day-to-day or week-to-week basis in order to best meet fluctuating demands.
Pro: Offers More Savings
Since the implementation of the Affordable Care Act, some businesses must offer a certain amount of healthcare to full-time employees. Unfortunately, many small businesses can't afford something like this. Luckily, if your business has fewer than 50 employees who are considered full-time, you're not subjected to this part of the Obamacare mandate. So, you could essentially save money by hiring an independent contractor rather than a full-time employee.
Con: Puts You Under Scrutiny
Because some businesses have misclassified their employees as independent contractors, the IRS has started cracking down and performing investigations. The IRS estimates that up to 30 percent of employees in the country are wrongful classified as an independent contractor costing the IRS over $1 million in federal taxes, and this could spell serious trouble for you if you're doing this.
The IRS believes that some business owners are doing this intentionally to save money on taxes, insurance, etc. Even if you're not doing it intentionally, you could still pay the price in the form of a hefty fine and back taxes for all the years of misclassification. The best way to avoid this is to ensure that you have a sold, well-spelled-out contractor agreement, which should clarify the scope of work, parameters for payment, etc.
Because the law surrounding employees and independent contractors can be confusing and complex, and with the IRS cracking down on contractor use and abuse, it is crucial that you take the time to consult with a business attorney (like those at Robert L Lilley Co Lpa). You want to make sure that the agreement that you have currently is adequate and complies with federal and state laws.