As your business grows, it might be time to start hiring help. You can do that by hiring employees or working with subcontractors. If you hire an employee, you have to deal with salaries, payroll taxes, and many other legal and HR related issues. If you hire a subcontractor, things are a bit simplified – as long as you follow the right guidelines.
Since many small business owners prefer to avoid the tricky waters of payroll taxes, let’s talk about you can hire help in the form of subcontractors.
Make Sure They Are Really Subcontractors and Not Employees
As I mentioned, employees are more complicated. You are responsible for withholding and paying the employment-related taxes (among other things). Per the IRS, your worker is only a subcontractor if he or she is responsible for keeping his or her own records and paying his or her own income and self-employment taxes. But there are three other factors to consider.
- Behavioral Control – If you control how the work is done (where they work, when they work, etc) then the worker might be considered an employee, not a subcontractor.
- Financial Control – If you direct and control economic aspects of the work (opportunity for profit/loss, how much they must invest in assets or pay in expenses, etc) then the worker might be considered an employee, not a subcontractor.
- Relationship – If you have a significant relationship with the worker (offering benefits, hiring them for a high number of hours, etc), then the worker might be considered an employee, not a subcontractor.
Cover Your Tax Bases
The first thing to consider is whether you’re working with someone in the United States or overseas.
In the United States
Just because you don’t have to withhold and pay taxes for subcontractors, doesn’t mean there aren’t filing requirements. If you pay a subcontractor $600 or more in one year, you must report those payments on a 1099-MISC unless:
- You paid them through PayPal or with a credit card
- You hired them through a service like Upwork or Fiverr or some other agency
If you do have to send a 1099, you’ll need to have your subcontractor fill out a W-9 form to gather information. Have them do it as soon as you hire them, and file it away so you have it handy when you send out 1099s the following year. The 1099 forms must be sent by January 31, so you won’t have much time to collect information if you forget!
Overseas
Don’t assume there are no filing requirements if you hire a foreign worker. No, you shouldn’t have to collect a W-9 and send a 1099, but some countries do require reporting. That’s why I highly recommend using some sort of service if you choose to hire subcontractors outside the US. There are legal and tax implications that can get tricky, and those services handle all that for you.
Stay in Budget
Many small businesses hire subcontractors instead of employees to keep costs low, but the danger is projects can balloon out of control and before they know it,they’re paying more than they would’ve paid for an in-house employee. To make sure that doesn’t happen, have a contract in place that explicitly details things like:
- The scope of work to be done
- The timeline to be followed
- The cost of the work (can be a set amount, hourly rate, or combination of the two)
- How the subcontractor will be paid (credit card, check, Paypal, etc)
- The timeframe the subcontractor will be paid in (100% upfront, spaced out throughout the project, etc)
- The terms if the contract is breached
Have a contract ready (ideally created by a lawyer), though some subcontractors may have their own contracts. Whoever’s contract you use, make sure you are both comfortable with the information because it a legally binding document.
Hiring help can be a game changer in your business. Whether you’re looking to hire an assistant, a bookkeeper, or just a little help once in awhile, you need to be prepared to deal with the tax and legal implications. These guidelines are a great place to start, but if you have more questions reach out to your accountant or lawyer.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.
