Whether you hire contractors or employees or a combination of both depends on your business needs and resources.
Many small businesses start out by hiring contractors to help with support tasks and projects as the business grows beyond what a single owner can do, but not yet earning income. to support full-time employment. It can be a smart, lean way to grow, but you lose the behavioral, financial, and relationship control you would have with employees.
You may want to hire a contractor when:
- You have a defined project or a mission in mind
- You have no guaranteed continuous work
- You want to benefit from the expertise of a service provider rather than providing the training, strategy and protocols yourself
- The job does not require scheduled times or a set location
- Work can be done independently without supervision
You may want to hire an employee when:
- You have work in progress for the role
- The worker must follow your company protocols or use your equipment
- Work requires scheduled hours and/or a defined location
- The job requires supervision and management
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The difference between 1099 and W-2 workers can be difficult to parse, but the spirit of the classifications is clear: contractors are self-employed workers who sell you a service while employees work for the benefit and under the direction of your company.
Once you know what kind of worker you’re hiring, choosing the right tax forms and meeting tax requirements is simple. Contractors fill out a W-9 when hiring, while employees fill out a W-4. At tax time, you file a 1099 for each contractor and a W-2 for each employee.
If the IRS determines that a worker was misclassified, you could be liable for additional taxes on their wages, as well as unemployment insurance and benefits extended to other employees, such as health insurance and pension plans. Clarity before hiring is also important in finding the right type of worker for the job.