As a small business owner you are always looking for a way to save money and improve cash flow. One method you may use is to avoid payroll taxes by using contract employees instead of w-2 employees. However you have to be very careful if you choose this method. The IRS has very strict rules governing the use of contract laborers. You may find these detailed at https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee.
One of the main things to consider when making the independent contractor election is control and benefits. Do you control the work hours, specific job duties, and responsibilities? Do you offer normal payroll employee benefits such as vacation pay, holiday pay, 401(k) contributions? If any of the above questions are answered yes, then you do not have an independent contractor and will be subject to penalties by the IRS and State Government Agencies if you try to treat and employee as an independant contractor.
If you choose to hire independent contractors, do the following:
1. You should not offer them no specific benefits
2. Do not require specific work hours from them such as..show up at 8 and leave at 5
3. You can provide them with a specific task or job and explain it fully to them.
4. You should allow them to complete that job on their own time and schedule.
5. You may set deadlines and expectations but not the specific time of when or how they will do the job.
6. You may also have them provide an acceptable bid for the amount they will charge for the job.
7. Expect to follow up with them on the quality of work and the completion upon time. If they have not
done the job to your expectations, require them to correct the work.
In summary, Independent Contractors are a great way for small business owners to expand their reach if they grow their business to the point of not being able to do the job themselves, but are not in a position to pay employer taxes and benefits. Just make sure you structure it correctly.