Employees or 1099 Independent Contractors?
Your business depends on well-written content, and you depend on professionals to write it, while staying covered by a contract template. However, when it comes time for taxes, you’ll need to know whether your professionals are independent contractors or actually employees. Understanding the difference can be tricky, but once you do, you can be confident you’ll have fewer worries in the future.
Freelancers or Employees?
The IRS has a few key guidelines that help businesses decide whether they have 1099 contractors or employees. Consider these five variables when deciding which type of workers you have:
Control over how work is done. If you require a worker to be in the office at certain times, they’re probably an employee. Freelancers choose when and where they do their work.
Compensation structure. While most employees are paid a regular annual amount, contractors are paid by the job – and need to receive 1099 at the end of the year to complete their taxes.
Training is not provided for freelancers.
Contractors use their own equipment whereas most employees have their computers and other office supplies provided by their employer.
Finally, freelancers work for multiple companies generally. If you are asking someone to work only for you, they are likely an employee.
Misclassifying a person as a contractor when they behave as an employee can lead to problems at tax time, and even issues with employment law, so it’s a good idea to make sure you classify all hires correctly.
The Pros and Cons of Each Classification
The above guidelines illustrate many of the advantages and disadvantages of working with contractors vs. employees. If you are paying someone as a 1099 contractor, you’ll save money on retirement, health, and other benefits. However, you should expect that they’ll request a higher hourly rate than an employee would, negating some of those savings. If you need a team member for a short-term project, occasional work, or work that can be performed remotely, freelancers can save you time and money.
When you have an employee, you have greater control over their work. You can also require them to be at work at certain times and prevent them from working for other firms. However, you may end up paying for non-productive time since they are not paid by the project. Additionally, keep in mind that your employee has more general knowledge about your business than contractors would, and can help you build long-term relationships with potential clients. Freelancers, however, are typically more concerned with growing their own business than growing yours long term.
Tax Implications
The tax structure is very different for employees and freelancers. As an employer, you are required to withhold employment tax for employees, pay your own taxes, and file a W-2 for each employee.
When working with contractors, you do not withhold taxes. Instead, the freelancers are considered business owners, and your company is their client. They are also expected to pay their own taxes, often quarterly. In these kinds of working relationships, businesses provide freelancers with a 1099 document that states how much they were paid over the previous year. For more information on 1099 and other tax requirements, visit the IRS website.
Keeping it legal
Should you choose to hire a freelancer, and classify them as independent contractors, make sure that you follow all of the relevant laws. The IRS created a 20-point checklist for determining whether someone is an independent contractor (1099) or employee (W-2). These questions include those outlined earlier in this article, plus others that go into more detail. Download the checklist here.
You’ll also want to put your agreement in writing. Use Bonsai’s contract tool to create written guidelines on work expectations. When both parties sign a contract, you can be confident that you’re on the same page about expectations, and you will be more likely to have legal recourse if the work doesn’t go well.
Building Your Freelance Team
Once you know how you are going to classify your freelance team, you can focus on finding the perfect one for your company. Some ways of finding great candidates include:
- Asking for recommendations from other business owners
- Posting an online job advertisement
- Searching online for top rated providers
You’ll have to put a little legwork in to find the perfect freelancer, but for most businesses, it’s a worthwhile investment. There may be a bit of a learning curve - remember, working with a freelancer is different than working with an employee, and you may need help. Consider seeking the advice of a freelance specialist to teach you how to manage 1099 contractors, so your business runs smoothly, or start using a Freelance Management System like Bonsai today - sign up for a free trial today.
Working with freelancers can be a great way to get high-caliber work without paying high-level salaries, especially if you don’t need a full-time team member. Whichever you choose to help grow your business, make sure you understand the differences.
