Many small businesses start as a “one-person band.” However, growth requires expanding from being a “solo-preneur” (or owner operator) to having help from other workers. Making the jump from one to many is sometimes scary. Most businesses don’t get it right the first time. It’s tough to recruit the right skills and personality on a limited budget. However, growing your workforce correctly is key to the continued success of most small businesses.
Finding the right form of employment relationship with your growing workforce is not always easy. Most businesses want to expand but are scared by the administrative burden of running a payroll, dealing with filing IRS forms or paying more than they can afford. I get it. I am a small business owner too!
When looking to expand your workforce, consider your options on a continuum from independent contractor to from full-time employee. Getting it right will keep the IRS and the Department of Labor at bay. Both agencies work actively to identify employees misclassified as independent contractors.
Among small business owners, there is the mistaken belief that if a worker isn’t working full-time (i.e. 40 hours a week) every week, this worker is an independent contractor. Nothing could be further from the truth. In fact, the IRS and the Department of Labor are hot on the compliance trail tracking down employees misclassified as independent contractor. The risk of misclassifying workers is high. It can result in costly fines and back pay of employment taxes.
However, hiring an independent contractor is often the first step to get help and expand a workforce. It represents a calculated business risk. A typical independent contractor is a business owner who provides B-2-B services. Think virtual assistant, marketing consultant, HR expert! Those are clearly independent contractors to most businesses. They are not integral to the business operations. They provide a specific service. Your relationship is bound by a contract and has an end date or a renewal date. Your business doesn’t have control over the operations of the independent contractor.
The IRS looks at a variety of factors when testing the classification of independent contractors.
Is the Work an Integral Part of the Employer’s Business? If the work is essential to your business, it is more likely that the worker is economically dependent on the employer. Work can be integral part of your business even if it is performed off-site.
Does the Worker’s Managerial Skill Affect the Opportunity for Profit or Loss? Workers who are truly in business for themselves must rely on their managerial skill and good decision making to be successful, not just technical expertise. Workers who face the possibility of sustaining a loss are more likely to be considered independent.
How Does the Worker’s Relative Investment Compare to the Employer’s Investment? A worker who invests significant resources on items such as tools and equipment is more likely to be an independent contractor. However, workers who invest thousands of dollars for work equipment can still be considered employees if their investment is less than the employer’s investment in the overall business.
Is the Relationship between the Worker and the Employer Permanent or Indefinite? Workers who are engaged on a permanent basis are more likely to be considered employees. Note that
What is the Nature and Degree of the Employer’s Control? Workers are not more likely to be independent contractors simply because they have the ability to control their hours and work independently thanks to modern telecommuting and work-from-home options.
Note that no one factor is determinative. The classification decision should be made on balance, having considered all factors. If in doubt, classify your worker as an employee. And you have several options.
Entrepreneurs looking to expand their operations should consider other options including:
- Part-time employees. Those employees work less than 40 hours a week. As a business is growing, there might not be enough hours to justify a full-time employee. Hiring a part-timer with a view to expand their hours as the business grows is the way to go.
- Seasonal workers only work for a set period of time because of the nature of their industry (e.g. summer tourism, holiday retail). However, they can still be considered employees. The key is whether the relationship between the worker and the employer is temporary because the worker is truly operating independently.
- Interns are another way to expand the workforce with a limited time commitment. Check this article to find out what constitutes a true internship.
