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.