Have you always wanted to have a team of staff working for you? Or are you the more solitary type, and would like to rent your extra booth space out to an independent contractor? Either business model can work wonderfully for you – depending on what you want.
Before you go ahead and make that decision, make sure you know what you are jumping into, and what it could mean for you. In this post, we’re going to explore what defines an employee and an independent contractor, and what separates them.
An employee works for your business. They have to follow your rules, handbook policies, dress code, and hours that they work. Along with having employees, you will have certain financial responsibilities. These responsibilities are non-negotiable. There are government policies in place that you as a business owner must follow.
Firstly, there are taxes. And if you are in the US, there is:
- Social Security
- Federal, state and local taxes.
- And, let’s not forget unemployment and workers’ compensation.
All of this can be cumbersome for many small businesses. However, don’t make the big mistake of opening up quickly, and calling your employees ‘independent contractors’. Any team member or person who has an issue with how you are operating, can report you to the proper authority for not deducting these line item taxes. So make sure to jump all the hoops!
Our staff and employees are very savvy, they have done their homework, and know in advance how they are to be paid, and what deductions are to be taken out of their pay. If you have ever been on the receiving end of a shorted pay-check, this can make your blood boil and cause hard feelings.
Being a good steward of your money – and your employee’s pay – is in your best interest. Make sure you have your ducks in a row before you open your doors, and open your business up to unnecessary scrutiny.
Under US Law, employers are required to pay their share and withhold the workers share of employment tax. Under the Fair Labor Standards, they must also meet the minimum wage and overtime obligations of their employees.
What Constitutes an Employee?
Generally, a person is an employee if the employer has the right to control the person’s work process. Here are three questions to ask yourself, before you classify your staff as an employee or independent contractor:
- Do you control your staff’s work schedule?
- Do you provide your staff tools and products?
- Do you have a dress code your staff must abide by?
If you answered yes to any of these questions, you have “employees”.
These rules can be a bit confusing, my recommendation is to seek the help of a tax professional, who is familiar with this type of business. There are variable factors in every situation. Many tax professionals can get the paperwork started for you to submit to the proper tax authorities.
If you are new to this, take my word for it, a payroll company is worth their weight in gold! I tried to do all of this by myself, and was overwhelmed by the paperwork, rules, and regulations. I finally caved to the tax professional with a sigh of relief. I thought by doing it on my own, I would save a few dollars – but it ended up costing me so much time. It’s just not worth it. Get your business on the right track from the very beginning to avoid any issues down the road.
The Pros of Having Staff
There are several benefits that come along with having employees. Most of all, you can control how you want your business to run:
- Hours of operation
- The shift scheduling
- Dress code
- Retail products
- Disciplinary actions and termination control.
We will discuss these more in-depth, in a future post.
The Independent Contractor
Again, there are very specific guidelines to designating yourself or others in your business as independent. You must give them access to the business during normal operating hours. You cannot tell them when to work. You cannot provide supplies, business cards or any other items you would provide your employees, including a phone. You cannot force them to sell products or use products you want them to use. Any pressure on the independent contractor to conform to these issues could re-classify them as an employee.
These are just a few of the details that can help you be clear on whether or not your worker is an independent contractor:
- The worker controls details of the work
- Worker operates in a business that is distinct from the employer’s business
- Work is done without supervision
- Skill level is specialized, is unique, or requires substantial training
- Worker provides their own tools and supplies, and works at other site than the employer’s
- Worker is employed for a specific amount of time
- Worker is paid by the project
- Worker is not part of the employer’s regular business
- Employer and worker do not intend to create an employer employee relationship
- Worker provides services to more than one business
- Management has no right to control the work process
My first and best piece of advice here is to have a one-on-one with a tax professional. Plan ahead, get everything squared away before you even open your doors. It may seem easier to go independent, but you lose all control.
An Example of the Cons
I had four manicurists working as independent contractors, and they all charged the same price for their services. On several occasions, I was confronted by a client regarding why the three other manicurists were using a very popular professional nail polish, and her tech was using a drug store brand, and charging the same fee!
The client felt short-changed, she was insulted… And, rightly so! She felt she deserved the same high quality product our other clients had access to. I couldn’t agree with her more. I asked the independent contractor if she would purchase and use the higher quality product. She refused. I couldn’t do anything, I felt a little helpless.
And of course, the other contractors ended up getting those clients in their chair due to the contractor’s indifference to the client’s wishes. I know this is a small example of how not having control can impact your business. But, it’s important.
Is It For You?
If you are a control freak, going independent might not be for you. You will lose sleep, have moments of insanity, and never feel settled with your business. Trust me, your contractors will let you know if you cross the line with them. They know the rules. They know you cannot control any aspect of their business.
Frankly, it takes a very disciplined person to be good at independent contracting. You are solely responsible for everything, and you have no back up. If you get sick, you have no one to cover for you. If you go independent know your tenants, because you have to share your space!
Think it Over Carefully
Be prepared, and don’t rush in with this decision. Make sure to do your research and consult with a tax professional. I can’t stress this enough – they may just be your saving grace, a few times over!
So what’s your experience with independent contracting? I’d love to hear about what you think, so be sure to leave a comment. And, if you have any questions, I would be more than happy to help 🙂