Hiring Employees or Independent Contractors
If you are thinking about going into business or are already in business, the task of hiring for your business can be quite daunting. There are several things to consider before hiring an employee or an independent contractor. First, you must think about your company’s needs and whether your company would be better served by hiring an employee or an independent contractor to provide certain services.
Depending on the nature of the work, the level of control, training and supervision involved, whose equipment is being used to perform the task, the IRS and the Department of Labor may classify the person that you hire as an employee or an independent contractor. Misclassifying an employee as an independent contractor has run several employers into difficulty and have made them liable for thousands of dollars in past employment taxes. Therefore, you must give careful consideration to whom you plan to hire to perform the work for your company.
Regardless of who you decide to hire, it is always a good idea to have a well written contract which outlines the relationship of the parties. For example, for employees, you may want to address whether the employment is at will and whether the employee is required to maintain confidential information, etc. For independent contractors, you may want to address that they are responsible for paying their own self-employment taxes, that they are not eligible to receive unemployment and/or other company benefits, that they will be required to maintain their own insurance, etc. For both, you may want to address whether there are any restrictive covenants that they must adhere to once their contract has been terminated.
If you are thinking of going into business and plan to hire employees, there are several additional critical things that you must do, which are as follows:
- You will need to obtain an EIN number for your company. In addition, each state has its own process for obtaining a state employer identification number.
- You must register with your state’s Department of Labor and pay your state’s unemployment tax to provide short term relief for employees who are terminated.
- Federal law requires that you post labor notices in your office informing employees about federal and state requirements for such things as minimum wage, overtime, sick days and holiday policies, etc.
- You will be required to have your employee complete a W4 form, including any allowances that the employee may have, to determine how much needs to be withheld for taxes. Employers must complete a W2 each year for every employee that they pay a salary, wages, or other compensation.
- You are required to comply with the federal Occupational Safety and Health Administration by adopting workplace safety measures to minimize the risk of employees getting injured on the job.
- You will be required to set up payroll to withhold federal and state taxes, including Social Security and Medicare, from the employee’s paycheck.
- You are required to pay into worker’s compensation and disability to protect employees who may suffer on the job injuries or who have illness or disability that is made worse by the job. Employers must provide worker’s compensation benefits regardless of who caused the injury.
- You are required to have your employees complete an I-9 to ensure that they are eligible to work in the United States. Your employee will be required to provide a social security number, their citizenship status and provide acceptable documents to prove their identity.
- You are required to report new hires to your state’s new hire agency within 20 days of hiring the new employee for the purpose of locating parents who owe child support and to reduce the risk of fraudulent government payments. Some states require you to report for independent contractors as well.
- You are required to file IRS Form 940 each year to report your federal unemployment tax for each year. This form is required if you paid employees wages of $1,500 or more in a calendar quarter or if you had one or more employees for part of the day in any 20 or more different weeks in the last two years.
- Although not required, it is important to set up an employee handbook which lays out company policies that the employee must adhere to. The employee handbook is a great place to lay out the company’s mission and values to employees.
- It is a common practice for employers to conduct background checks. In some fields such as healthcare and child services background checks are mandatory. Applicants must authorize the employer to run the background check. You will also need to check your state’s restrictions on background checks.
- Another consideration is that, although employers are not legally required to provide health insurance to their employees, the Affordable Care Act imposes penalties on employers with at least 50 or more employees that do not provide coverage to 95% of those employees.
The bottom line is, whether hiring an employee or an independent contractor, you want to make sure that you are prepared with the necessary paperwork needed to be in compliance with federal and state regulations and to avoid any pitfalls or unforeseen consequences from misclassifying an employee as an independent contractor. If you are not sure what needs to be done, you should consult with an attorney who may be able to assist you in making the process a lot less daunting.