Should I Hire Employees or Contractors?

Monday, July 30, 2018

Many businesses in Washington State are faced with the question of hiring employees or starting people out as contractors. This is especially relevant for start-ups or businesses who are in the growth phase. When cash is tight, there may be little option other than to hire people as contractors. However, this is not always the right decision from a legal and taxation perspective, nor is it always the right decision from a business one. A business attorney and CPA can provide specific advice. As a general rule, here are some things to consider -

Contractors must work independently

This is where a lot of businesses run into trouble. Independently means without specific direction or supervision regarding how they complete tasks or when. In other words, if someone is an independent contractor, they cannot be told to start work at a certain time every day. Nor can a business owner or manager demand that they work in a specific manner. This freedom is something that many people desire and so some will choose to work for a company in this capacity. However, from a management perspective, it is critical to note that if more control is desired - hiring independent contractors is not the right solution.

Businesses still have some liability

Some business owners choose to hire contractors because they feel it may limit their legal liability if something were to go wrong, they got into an accident, etc. However, as lawsuits filed against Uber have demonstrated, it is still possible for businesses to be sued for the actions of contractors working for them. If this is a concern, it is wise to speak with a business attorney about the best strategy for limiting corporate liability.

Taxation

One of the biggest savings associated with hiring independent contractors versus employees is a reduction in taxation. Although businesses may not have to pay the payroll taxes associated with having employees, independent contractors will likely be considered “covered workers” in Washington State for purposes of workers’ compensation coverage. However, the IRS will ultimately determine if someone is a contractor or employee and if they were designated incorrectly, may impose fines. We recommend contacting the IRS to make the determination or speaking with a CPA.

Consult L&I to receive Washington-specific information

This guide from the Washington State Department of Labor & Industry can help clarify regulations and answer some basic questions around contractors and employees. Here, you will find a few tests to determine if your worker can be classified as an employee or contractor, and see if they will be considered a covered employee for L&I purposes. What we mentioned in this article are just a few of the items that must be considered when making this decision. The guide goes into additional detail and also provides contact to sources at L&I who can provide specific advice. Keep in mind that L&I actively audits businesses and there are penalties for using contractors who should be categorized as employees. In other words - it is worth it to get this right.

Get advice for your business

For additional clarification and planning purposes, it can help to speak with someone about your business. Cindy Brooks at the SBDC is available to provide assistance to Skagit County businesses owners and entrepreneurs. You can reach her by emailing cindy.brooks@wsbdc.org.

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