Quarterly Newsletter Fall 2013  

 

How does your business cope with the peaks and valleys of increased workload? By hiring the expertise of subcontractors, independent contractors, or freelancers to handle your extra work, your business can quickly scale up without creating a lot of additional overhead.

However, to realize these savings it’s critical that you understand the pros and cons of working with subcontractors, and the hows of finding the right one for your needs. Here are five tips and considerations to help you assess your hiring strategy.

How Much Money Can You Save?

Some basic math suggests that hiring an employee can cost a small business owner 25 percent more than it would to hire a subcontractor to do the same work. The biggest factor is what you would typically pay for an employee’s Social Security and Medicare tax, worker’s compensation insurance, liability insurance, employee benefits, training, and so on.

The overhead for specialist functions can also be a lot less if you outsource them, instead of hiring in-house staff to handle them.

You might also want to consider outsourcing your administrative functions. Virtual assistants can be hired for as little as $20-$50 an hour to help with all facets of your business – from managing your business expenses and maintaining inventory to proofing and formatting your sales pitch in PowerPoint.

Other Benefits of Working with Subcontractors

There are also several other reasons why small businesses find value in utilizing subcontractors. Using the specialist skill set of a freelancer/subcontractor can allow your business to more appropriately meet clients’ needs. By hiring specialists for some tasks, your clients are happier, and you’ve kept your own experts focused on the work they perform best.

Subcontractors can also be useful when you are in a start-up or expansion phase and can’t afford to take on full-time employees to immediately help you operate, market, and grow your new business.

Subcontractors can also help out during busy seasons when you simply don’t have enough hands-on staff.

Deciding to Outsource

Several factors come into play when determining whether or not to seek the help of subcontractors, do it yourself, or hire more employees. To help you decide, consider the following:

• Cash – What would it cost to hire someone to do the work or do the work yourself, versus having someone else do it? This includes the immediate costs (recruitment, training, desk-space, computer equipment, etc.) and long-term costs (payroll taxes, benefits, etc.)

• Skill Set and Time – Weigh whether you have the time to recruit, train, and manage a full-time employee for the task. Can you immediately access the skill set you need from a reputable and trusted subcontractor?

• Past Performance – How successful are you at making good hiring decisions? How many bad ones have you made?

Know the Law! – Classify Independent Contractors Correctly

The law is very firm on how businesses classify independent contractors/freelancers versus employees and any violation can come with costly IRS penalties.

Independent Contractors vs. Employees

Independent contractors and employees are not the same, and it's important to understand the difference. This distinction will affect how you withhold a variety of taxes, and misclassification of an individual may result in a number of costly legal consequences.

An Independent Contractor:

• Operates under a business name • Has his/her own employees • Maintains a separate business checking account • Advertises his/her business' services • Invoices for work done • Has more than one client • Has own tools and sets own hours • Keeps business records

An Employee:

• Performs duties dictated or controlled by others • Is given training for work to be done • Works for only one employer

Many small businesses rely on independent contractors for their staffing needs. There are many benefits to using contractors over hiring employees:

• Savings in labor costs • Reduced liability • Flexibility in hiring and firing

Why Does It Matter?

The distinction between employee and independent contractor is important, since it affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes. In addition, misclassification of an individual as an independent contractor may have a number of costly legal consequences.

However, in legal terms, the line between an independent contractor and an employee is not always clear. Your workers are not independent contractors because you say they are.

The Supreme Court has claimed there is no single test for determining if an individual is an independent contractor or an employee according to the Fair Labor Standards Act. However, the following guidelines should be taken into account for determining whether the work being done is by an independent contractor employee or an employee based on the situation presented.

1. The extent to which the services rendered are an integral part of the principal's business. 2. The permanency of the relationship. 3. The amount of the alleged contractor's investment in facilities and equipment. 4. The nature and degree of control by the principal. 5. The alleged contractor's opportunities for profit and loss. 6. The amount of initiative, judgment, or foresight in open market competition with others that is required for

the success of the claimed independent contractor. 7. The degree of independent business organization and operation.

Whether a person is an independent contractor or an employee generally depends on the amount of control exercised by the employer over the work being done. Spelling out and describing how a job is to be done or limiting the actions of the worker may establish an employer-employee relationship.

Knowing the rules, there are a lot of great benefits to using subcontractors, independent contractors, or freelancers. Please contact us if you have any questions on your business can best use subcontractors.