One of the most exciting parts to starting and growing a business is hiring other people to work with you. But for many entrepreneurs, this is one of the most complicated tasks due to regulatory issues. But with the right planning, you can make the right decisions to help your new business grow.
The key thing to remember is that when you hire someone to work for your new business, you need to classify them as either an employee or an independent contractor. Generally speaking, you’ll have less regulatory work to do when you hire independent contractors, but you’ll lose some control over their work. Conversely, when you hire employees, you’ll gain a lot of control over their work, but you’ll also gain a lot of additional regulatory obligations.
Regardless how you classify them, the IRS will have the final say.
To help you make the right classification, here are five things to consider:
When you hire an employee, you’ll have a lot of control over their services. You can dictate when and where they work, and you can oversee their performance on a daily basis.
However, when you hire a contractor, it is generally understood that the contractor will set their own schedule, will decide where to work, etc. You can have a say over their final work product and some control over the timing of the work, but the finer details are left to the contractor.
As you can guess, business owners usually have to provide their employees with equipment to get the job done. For example, you may need to buy them a phone, computer, desk, and office space.
Conversely, when you hire a contractor, you don’t have to provide any of those items unless your contractor agreement requires you to do so. And even then, it is uncommon for you to have to buy their equipment. What’s more common is for you to just reimburse them for some things they might purchase for you under the agreement.
Perhaps the biggest difference between employees and contractors is how you pay them and how taxes are paid to the government.
When you hire an employee, you will have to withhold portions of their paycheck for their income and employment taxes and then you’ll have to remit that to the government throughout the year. Additionally, you’ll have to pay a portion of their employment taxes to the government yourself. The process can be quite a pain and most companies outsource that function in one way or another.
On the other hand, when you hire a contractor, it’s quite a bit easier. You pay them their service fee, but that’s it. You don’t have to do any withholdings for taxes and they are responsible for all of their employment taxes. The only catch is that if you pay a contractor more than $600 in a year, you’ll need to file a 1099 with the IRS to let them know about the payments (see this post for more on that).
4. INTELLECTUAL PROPERTY
If your workers are creating anything which might be protectable under intellectual property law, then you need to pay special attention to the rules governing ownership of IP.
It’s kind of easy in employment relationships. In short, anything your employees create within their scope of employment will be owned by your business.
But for contractors, it’s not so easy. There are various rules at play, but what is important is to always get a written agreement with your contractor that makes it clear you own everything they create for you under the contractor agreement. If you don’t, they might be able to walk away with the intellectual property rights to the works you paid them to make.
5. TERMINATION RIGHTS
Most employee-employer relationships are “at will.” This means that either party can terminate the relationship at any time, for any (legal) reason.
Conversely, the termination rights of a business and its contractors is dependent on whatever your contractor agreement requires. Perhaps you can’t terminate at all; or perhaps either side can terminate with 30 days’ notice.
HAVE MORE QUESTIONS?
If you are at the stage where you are ready to start hiring people to work with you, you’ve probably got other questions about how to grow your business. That’s where the Kauffman Foundation’s FastTrac program can help you. You can enroll for free at www.fasttrac.org.