Owning and running a business alone is demanding, especially without any help. Finding help for your business can come in forms of employees or independent contractors. It’s your choice but whatever your choice is it will have an impact on what expense you can write off in your tax declaration from come tax filing time.

Independent Contractors

As business starts picking up and you need help you should want to use an independent contractor to help you out. Making payments to independent contractors for their work is completely deductible. All you have to do is make your claim for the deduction when filing your return. If you pay your independent contractor more than $600 during a single tax year, you must also issue a 1099-MISC in January of the following year. Lastly and very important, you do not have to pay employment taxes or make with holding on the compensation.

However, there is a set of standards that are set by the IRS when classifying a worker contractual help or independent contractor status. The crucial determination is whether or not you control the actions of the worker. The employer should show proof that the workers have freedom to how they perform the job required of them. An independent contractor does not have to follow scheduled work hours set employer and is paid based on the results, rather than the time spent at the workplace.

Employee

Employers who are hiring employees instead of independent contractors are liable to pay more employment related taxes. Under federal law employers are responsible for paying employment taxes related to the worker, even if there is only one. To begin, employers must withhold FICA, social security and income taxes from employee paychecks. The law also requires employers to provide counterpart funds for FUTA payments for their employees.

FICA is short for the Federal Insurance Contribution Act. This Act allowed a system to collect and provide benefits for workers that retire, are injured or become disabled. Another name you might know FICA for is Medicare.

FUTA stands for the Federal Unemployment Tax Act. This Act created a system that supplied unemployed workers who had recently been out of a job with temporary benefits until they obtain a new job. This federal program is different from the state unemployment acts. There are some employers that may not agree with the programs but all are required to comply.

Sum It All Up

Reviewing what we discussed, it is less expensive for employers to hire independent contractors instead of employees. The tax burden is significantly less, but be sure to the IRS doesn’t reclassify them as employees because that could mean penalties for your business.