Top five questions asked by new business owners, part three

Question #3: Should I have employees or contractors?

Your business is growing, and you need help. You can’t be everywhere at once, so it’s important that you hire someone you can trust to take on some of the burdens of running your small business. Once you’ve found that person you hit the pentacle question: Should I pay them as a contractor or as an employee?

Like so many other things, the answer is “it depends.” There is a test that the IRS applies to the employee vs. contractor equation:

Do you determine the hours they work? Contractors make appointments but determine their own schedules, while employees are scheduled at the business owner’s discretion.
Do you provide the instruments they work with? Contractors bring their own tools, computers, vehicles and provide their own insurance. Employees use your equipment.
Do you provide any benefits, insurance, pension or paid time off? Contractors get none of these perks, while employees may.
There is no magic formula to whether or not a person is an employee or not. A good rule of thumb is to offer the person you are thinking of hiring a contract position for a specific period of time. If it works out you can always move them from a contractor position to an employee position at a later date. Make sure you always get the required documentation to allow your bookkeeper to prepare year-end forms like a 1099 or W-2. As always, if you need further assistance in making these decisions you can always call your bookkeeper or tax professional for guidance.

The new 1099 law will leave you dazed and confused

Anyone who has heard of the new 1099 law has been dreading end of year reporting for 2011. New requirements would force businesses to send 1099’s to all their vendors, even corporations or those from whom we buy goods, like Best Buy. Yes, anyone you paid more than $600 to, for any reason, would be subject to 1099 reporting.

The Senate fought over several drafts of a measure to repeal the law, finally passing an amendment repealing the changes in the 1099 requirements. The House of Representatives took its sweet time but finally passed the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” two weeks ago, which repeals the additional 1099 requirements. So it looks like we are out of the woods on that one.

Well, not so fast. Just like the original 1099 reporting requirements were a “rider” to the health care legislation, House Reps included riders in the legislation to repeal the new 1099 requirements that are opposed by the president. Confused yet? This means the president may veto the law and send us all back to the old drawing board. Meanwhile small business owners are advised to start collecting 1099 information on anyone you say hello to just to be on the safe side.

You have to love politics.