With every venture large and small there comes a time when you can’t do it all. It’s at this juncture, as you are reaching a critical mass, that you can potentially make a tremendous costly mistake that can come back to haunt you for many a moon.
Many home-based business owners start out on their own to break free from corporate America and enjoy the feeling of success derived from the fruits of their own labor. Being your own “everything” from CEO to janitor is truly a great feeling. Then something happens–growth. With growth comes a myriad of new challenges that one person can no longer tackle alone. Once you’ve past the start-up phase and move into the growth-phase you need to hire some help.
At this phase of your home-based business you need to make a plan and ask yourself what kind of help you require and how is it going to aid you to maximize your productivity & profits. Do you need someone to answer the phone or someone to do your payables, receivables, and everything else in between? Or do you need someone to perform your marketing? At this critical juncture you need to consider not only whom to hire and where to place ads on web sites or in print, you need to decide just what type of hire will it be. Will this new person be a full-time or part-time employee or should you consider hiring an Independent Contractor, also known as a “1099”?
When you hire an employee you need to address the additional costs associated with doing so. You must consider Federal and State taxes, social security taxes, and any number of additional taxes that can make your head spin. A good accountant will come in very handy at this point to aid you in making your decision. You also need to consider where your new employee will be working and what they will use as furniture and business equipment. If you’ve grown from the coffee table into your spare room do you have enough space for a second person? As you can see, hiring a second person can be more taxing, time consuming, and costly than you first have thought.
Here is where the story gets even more tricky. As a rule of thumb, when hiring an employee you should usually estimate costs at roughly 30% over the wage you will be paying them. So, if you thought you’d pay your new hire $14 per hour, your true cost will most likely be upwards of $18 to $20 per hour.
And before you think that hiring a 1099 will make those extra costs magically disappear, consider that while 1099’s do afford you more flexibility, they usually charge more for their services. While hiring a contractor can ease the tax burden associated with having an employee, this flexibility for your now growing home-based business can come at a high price if this step isn’t well thought out.
Definition of a 1099 Independent Contractor
It’s very important to understand what a a 1099 is. Basically, a 1099 is an individual or business that provides services to another individual or business. A 1099 is a separate business entity and is not considered an employee. Some examples of 1099’s are consultants, agents, brokers or web designers. If you hire a maintenance company to paint your home office, the company is a 1099. The IRS has established a test which can help you determine whether a worker is a 1099 or an employee.
Disadvantages of Hiring a 1099
The main disadvantage of hiring a 1099 is miss-classification. Miss-classification is by far the biggest mistake you can make in this arena of hiring help. If you simply label said new hire as a 1009 that isn’t enough. They must actually be a 1099. If you do miss-classify an employee as a 1099, you might be subject to potentially huge IRS penalties such as back-taxes and interest. You might also risk exposure for an audit if your so-called 1099 attempts to file for unemployment benefits upon their termination. In such situations, you’d better be able to protect yourself by proving that the arrangement was for a 1099 and not a employee.
Additional Food For Thought
If you do decide to go the route of hiring on a full-fledged employee you need to determine who that person really is. Doing a background check for roughly a hundred dollars or so might be the best money you’ve spent in a long time.