Preparing to Staff Your Business
Staffing your organization is a critical component of building your operation. Finding the most qualified personnel is one of the most challenging management responsibilities.
There are several ways to add personnel to your facility.
- 1099 contract personnel
- Full time or part time employees
1099 Contract Personnel
When a person is an employee of a company, they are paid on the IRS form W-2 which automatically withholds and pays all of the income taxes required by the IRS. These taxes include Federal Income Tax, State Income Tax, FICA (Social Security and Medicare), plus all of the employer taxes (FUTA (Federal Unemployment Tax), FICA (Social Security and Medicare), and SUI (State Unemployment Tax)).
When a person is paid on the IRS form 1099-Misc., all earnings are paid on an untaxed basis. The individual is then responsible for all of the appropriate taxes.
Caution should be used when considering a 1099 contract staff member. Incorrectly classifying an individual as a contractor, rather than an employee, can result in significant fines for the employer. The IRS has a 20-Point Checklist (see below) to determine if the staff member is really a 1099 contract person or an employee of the company.
The key factor in determining how to classify an individual is who has the “right of control” over the individual’s performance of the job and how the individual accomplishes the job? The greater the control exercised over the employment, the greater the chance that the controlling entity will be held to be the employer. The right to control (not the act itself) determines the status as an independent contractor or employee.
The 20-point checklist is only a guideline; it does not guarantee that a person is correctly classified. There is no one single homogenous definition of the term “employee.” Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee.
Many states, including Massachusetts, have much stricter definitions of who constitutes an independent contractor. Familiarize yourself with state laws, and always consult with an attorney if you are unsure of the application in a given case.
Following are the 20-points that have been established by the IRS:
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his services at any time?
Before bringing on an individual as a contract employee, we strongly recommend reviewing the situation with your Accountant or Employment Law Attorney.
Full time or part time employees
Employees are defined as those whose method of working can be controlled by their employer, are regular employees and receive a W-2. If you elect to hire employees, the following will apply. The employer must pay income, Social Security, and Medicare taxes for the employee. The employer must also match social security and Medicare taxes. These taxes are deducted from the employee’s salary, but the employer is required to collect them, make their contribution and send them to the IRS on the behalf of the worker.
The employer must pay unemployment tax. The government gives aid to those who have lost their jobs and are trying to find work in the form of unemployment benefits. The funds for this program come from a tax on businesses with employees. The tax is not deducted from an employee’s pay and is solely funded by the employer.
They must issue an IRS W-2 form. At the end of the tax year, the employer must send copies of a completed W-2 to the employee and the Social Security Administration. This form will notify the government that the employee has received funds and allow the employee to file state and federal income tax.
Hiring your own employees requires significant record keeping and also creates legal exposure for you. Before bringing on any employees you must ensure that you have all of the necessary policies and procedures in place.
It is also important to ensure that employees are classified correctly in accordance with the Fair Labor Standards Act (FLSA) and wage and hour laws. Below are general employee classifications.
Your Number of Full vs. Part Time Hours May Be Different Depending on your State and City.
A full-time employee is an individual who works a normal forty-hour workweek and is hired for an indefinite period.
A part-time employee is an individual who works less than a normal workweek and is hired for an indefinite period.
A temporary employee generally is an individual who is hired either part-time or full-time for a specified, limited period.
A nonexempt employee generally is subject to the minimum wage and overtime provisions of the Fair Labor Standards Act (“FLSA”) and is typically paid either on an hourly or salary basis.
An exempt employee is exempt from the provisions of the FLSA and is not entitled to overtime payments. Exempt employees typically are paid on a salary basis and include administrative, executive, and professional employees, outside sales representatives, and certain highly skilled computer professionals.
Full-time, part-time and temporary employees may be classified as either exempt or nonexempt. Other flexible staffing classifications or arrangements may be added as needed.