Should You Hire Independent Contractors or Employees?
Hiring for the first time can be a terrifying necessity if you plan to grow. You must trust that another person will deliver the same care you have always provided your clients, and that loss of control often leads owners to grip tightly onto rules for their new staff members to follow. But the amount of instruction you are allowed to give your new hires depends on how you define the relationship between the two of you.
If you are an owner who is intending to create practices that each worker must adhere to, you will likely prepare a how-to manual that details how you would like your company representatives to perform. You may think about having your workers sign a non-compete agreement so that they remain loyal to your company, and you may expect them to work with you on a continual basis so you can offer your clients a consistent walker or sitter.
If, on the other hand, you are comfortable with allowing staff to run independently with little oversight, the alternative is to operate similar to that of an agency, connecting independent dog walkers and pet sitters (who operate like independent businesses) with customers for short-term contracts. Each worker would define their own rules as to how the walks and pet sits are performed, and they would be liable for purchasing their own equipment and filing self-employment taxes.
These two distinct ways of running your company illustrates the differences between hiring employees and hiring independent contractors (ICs), as defined by the Internal Revenue Service (IRS). The differences between the two are stark, so why are so many dog walking and pet sitting companies operating with an employer-employee structure yet declaring a business-contractor framework to the government?
Defining Independent Contractors and Employees
The vast majority of first-time business owners are drawn to the idea of bringing on independent contractors because, by all accounts, it seems easier and less costly than hiring employees. And it’s true, hiring employees means the company is responsible for withholding, depositing, reporting and paying employment taxes, paying unemployment tax on wages paid and providing workers compensation, along with other benefits such as sick leave and holiday pay.
In online pet sitting forums, many members discuss freely hiring ICs, and there are likely other companies in your area who operate this way. However, before following blindly behind this trend, you must consider the legal consequences of your decision.
In determining whether the person performing the work is an independent contractor or an employee, there are three main categories the government considers:
Behavioral Control: Behavioral control refers to whether the business or the employer has the right to direct and control the worker. An employee is subject to the business’s instructions on when and where to work, what tools or systems are used, what work must be performed by that individual and in which order the work should be done. Additionally, if there is an evaluation system in place or any training has been provided by the business, the assumption is that this is an employer-employee relationship.
Financial Control: Financial control refers to the control that a business has over the economic aspects of the worker’s job. An independent contractor will typically invest in equipment necessary for the work, and they are permitted to advertise and seek additional dog walking and pet sitting work – even if that means working for your competitor.
Relationship: Many companies will ask their new hires to sign a contract defining them as independent contractors and obligating them to pay their own self-employment tax. However, these contracts matter little to the IRS because how the parties work together ultimately defines the employment status. If you hire a worker and expect him or her to stay for longer than a specific reservation, this is considered evidence that there was intent to create an employer-employee relationship. Finally, if the worker is performing duties that serve as the main source of income for the company, they are more than likely an employee.
When reviewing the differences between an independent contractor and an employee, there leaves little grey area as to how pet sitting and dog walking companies should be defining their workers. More often than not, pet sitting and dog walking companies operate in an employer-employee structure but classify their workers as ICs. There are some business owners who simply do not know the differences, but there are also companies who knowingly misclassify their workers thinking they are too small for the IRS to flag, while other companies are willing to take the risk.
Consequences of Misclassifying an Employee as an Independent Contractor
If you fall into the category of thinking your company is too small for the IRS to notice, think again. An independent contractor who tries to file for unemployment wages or a disgruntled IC who reports his or her possible misclassification can lead to an IRS audit of your business. If you are found to have misclassified your workers as independent contractors when in fact they are being treated as employees, you will be responsible for revising your three previous tax returns. Once you have accurately re-filed your returns, you will owe three years of back taxes on all misclassified workers.
Once subject to a review by the IRS, you do have the option of voluntarily reclassifying your workers before the determination is complete. This voluntary reclassification is also available for companies not yet flagged by the IRS, but who want to begin treating their workers as employees. The advantage to voluntarily reclassifying your workers as employees before the IRS conducts an audit is a partial relief in tax penalties, but those looking to utilize this program must still amend their tax returns for the previous three years.
When considering hiring, ensuring that your company is compliant with the IRS’ employment status determination will save you time, stress and financial hardships down the road. Should you wish to operate a company supported by independent contractors, you will be contracting single-person businesses you have minimal control over. However, if creating a company culture and defining the processes by which your hires will operate, you will be best served by setting up the employer-employee relationship from the start.
To view the full definition of the relationship between employers-employees and employers-independent contractors please see the IRS’ website: https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation