Payroll Part 1: Contractors vs Employees
Welcome to Part 1 of our 5 part series on Payroll for online businesses.
Part 3: What is FUTA and SUTA Tax?
Parts 4-5 are coming soon!
So you’re ready to hire help in your business, but not sure whether to hire a contractor or an employee. Let’s talk about the similarities and differences so you can decide which is the best option for your business.
Contractors
I’d say most online solopreneurs choose to hire contractors when they’re first hiring help in their business.
Why? Because…taxes!
Contractors will be required to save and pay their own taxes to the IRS, state, and local municipality (if applicable). That means you, as the business owner, simply need to pay their fee however they take payment and keep a record of that payment in your bookkeeping.
If you paid the US contractor more than $600 with cash, ACH (bank to bank transfer), or an ACH app like Venmo (personal not business), you will need to file and send a 1099-NEC in January for the prior year. This is why it’s so important to keep up with exactly how much you paid them over the year.
Need help filing one or multiple 1099-NEC or 1099-MISC forms? We can help! Send an email to hello@radicalprofitsclub.com.
Can you choose to pay anyone as a contractor?
No, there are some rules on who is considered a contractor, but the main point to remember is a contractor gets to make their own hours and decides how to get the job done themselves.
Also keep in mind if you’re hiring a contractor you cannot demand their full attention and get upset if they have other contracting jobs going at the same time unless you have them sign a contract explicitly stating this.
Employees
If you plan to have the person work certain hours or you dictate how the job is completed, you have an employee!
Congratulations! But with an employee comes the added responsibility of employee and employer taxes that you have to withhold, put aside, and pay to the government.
We will talk about these different taxes and how to run payrolls later in this series, but just know there is inherently more work and potentially more cost involved with having an employee vs. a contractor.
But unlike a contractor, you can legally limit “moonlighting” of an employee (where they have a second job), but remember they also have the right to quit and if they do not want to comply.
An example of when to hire an employee vs a contractor
When we began hiring our team we decided to hire employees straight out of the gate. Why would we do this knowing it would be more work and potentially cost us more?
Because in our line of work, we don’t care when our bookkeepers work, but we DO care that the work is done by a certain day each month and we DO want them to use our SOP for bookkeeping. Therefore, we had to hire employees.