Employee? Consultant? Or Independent Contractor?

By Nina Kaufman, Esq.

You’ve reached a point where you’re ready to tear your hair out. You’re pulled in 17 different directions and, try as you might, you haven’t found a way to manufacture the 28-hour day. Much as it’s daunting, you’re staring down an inescapable fact: In order to grow your business, you . . . need . . . staff. But what kind? In-house or outsource? Full-time or part-time? Hourly or project-based?

Part of that decision you’ll base on the cost. Here are some of the pros and cons of the different options, nicely outlined by Linda Coleman at BizTaxTalk.com (Note: She looks at it from the perspective of the worker choosing how to be hired):

Pros: Always at your beck and call/dedicated work force

Cons: You pay for the privilege with employment taxes, benefits and increased risk of employment liabilities (discrimination suits, employee theft, time for supervision and training)

W-2 “Consultant” (someone hired out to you by a broker or third-party service):
Pros: Can get full-time staff without the need to offer benefits (the broker may do so); mitigates the risk of IRS penalties for choosing the wrong employment category

Cons: You pay a higher fee to the employment broker who provides you with the employee; cost could be prohibitive<

1099 Sole Proprietor:
Pros: You only pay for what you need when you need it; no need to account for employment taxes/withholding or benefits

Cons: Big risk that the IRS (and state tax authorities) will consider your 1099 proprietor an employee and thus subject you to penalties and interest for late taxes–even if you have an agreement stating that the worker is an independent contractor (the IRS will disregard form over substance)

Independent Contractor (B2B):
Pros: By hiring a corporation or LLC to provide the services you need, you can avoid getting caught in the employee/contractor “net”; no need to account for employment taxes/withholding or benefits

Cons: Independent contractors are independent businesses with their own client base; service may not be immediate.

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