Hiring independent contractors

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An independent contractor can save a small business 10 to 15 percent compared to a paid employee.

By Ken McEntee

Owning and operating your own small business can be expensive. Some businesses are able to control costs by using independent contractors instead of hiring paid employees. 

However, cautions Gary Cerasi, CPA, owner of Creative Business Strategies, tax laws can complicate that strategy. He explains here:

Q: What’s the advantage of hiring an independent contractor?
A:
An independent contractor can save a small business 10 to 15 percent compared to a paid employee, mainly because the business doesn’t have to pay employment taxes like Social Security on a 1099 contractor.

Q: What does 1099 mean?
A:
Wages of employees are reported to the IRS on a form called a W-2. Payments made to contractors are reported on a form called a 1099.

Q: What’s the difference?
A:
An employee is completely under the direction of the employer and has all of his or her needs for tools and equipment and vehicles provided by the employer. An employer has to contribute half of an employee’s Social Security and Medicare taxes and 100 percent of the unemployment taxes and worker’s compensation insurance.

Q: Can a business use contractors to save?
A:
A worker must meet at least 13 tests to qualify as an independent contractor. For example, a contractor must be truly independent and able to work for multiple clients. He or she must work under a contract, issue invoices to the business and provide his or her own tools and supplies. A contractor must have his or her own insurance and worker’s compensation and is responsible for paying his or her own taxes.

Q: What’s the advantage to hiring paid employees?
A:
An employer can set rules and control the actions of an employee in terms of when to work and how to perform the work, but the employer is also responsible for employees’ actions as their agent.

Schedule a no-cost consultation with Gary, at 440-546-9359. Creative Business Strategies is located at 192 East Wallings Road, in Broadview Heights. You can learn more at CreativeBizStrat.com.