How do I pay my employee?

Question

Hello all,

Thanks in advance for any replies.

I have one full-time person who helps me in managing my business. I also have a part-time maintenance person. I have been thinking of hiring the part-time person full-time also.

So my questions are:

1) I pay the current full-time person weekly by writing personal checks, so he is basically an independent contractor. I asked my CPA and he said it's OK to keep him as an independent contractor and no need to do payroll for him. Is that accurate?
2) If the above is fine, I plan to do the same thing when I hire the maintenance person full-time also. Just write personal checks every week.
3) For people who have full-time employees, how much is the extra cost of hiring some one full-time vs 1099?
4) If statement # 1 is incorrect, any recommendations on who I can use for payroll? What is the pricing?

Thanks!

Steven Hamilton II · Answer

Sam M.,

A better comparison would be less than 20 versus greater than 20 hours.  25 vs 40 each and every week, I'd be considering them an employee.  If it is one week 40 and one week 10, I'd be reassessing and looking over the long term.

Toby Johnston · Answer

Sounds like you have an employee to me.  It always comes down to a "facts and circumstances" test with the IRS normally taking the position that the person is an employee unless you can prove otherwise.  I would sign up with a payroll company like ADP, Intuit Payroll, etc and start the process.  If you are audited and lose, they will seek back taxes, penalties, and interest on the old years if they feel like the employee relationship existed.  If you decide to keep treating as a contractor or have other contractors, don't forget to actually issue the 1099s.  There are other fun penalties and possible disallowance of your expenses if you fail to file the 1099s.

Kenneth LaVoie · Answer

For years, unemployment board and worker's comp board have defined subs vs. employees slightly differently here in Maine, so last year they go together and gave us a pretty tough but fair list. I'm sure each state is a little different, but I'd still say this list would be a good universal "common sense" decision tool on whether you can safely treat someone like a sub vs. employee.

Required Criteria (all criteria must be met)
1. The person has the essential right to control the means and progress of the work except as to final results;
2. The person is customarily engaged in an independently established trade, occupation, profession or business;
3. The person has the opportunity for profit and loss as a result of the services being performed for the other individual or entity;
4. The person hires and pays the person's assistants, if any, and, to the extent such assistants are employees, supervises the details of the assistants' work; and
5. The person makes the person's services available to some client or customer community, even if the person's right to do so is voluntarily not exercised or is temporarily restricted.
 
Disjunctive Criteria (at least three (3) of the following seven (7) criteria must be met)
1. The person has a substantive investment in the facilities, tools, instruments, materials and knowledge used by the person to complete the work;
2. The person is not required to work exclusively for the other individual or entity;
3. The person is responsible for satisfactory completion of the work and may be held contractually responsible for failure to complete the work;
4. The parties have a contract that defines the relationship and gives contractual rights in the event the contract is terminated by the other individual or entity prior to completion of the work;
5. Payment to the person is based on factors directly related to the work performed and not solely on the amount of time expended by the person;
6. The work is outside the usual course of business for which the service is performed; or
7. The person has been determined to be an independent contractor by the federal Internal Revenue Service.

Sam M. · Answer

Steven Hamilton II

Thanks!! That's very helpful. Does it make a difference if I hire someone for 40 hours vs 35 hours? What will be my approximate additional cost if I hare someone for 35 hours a week at $10/hr?

Thanks again for all your help!

Steven Hamilton II · Answer

Sam M.,

At that point they are definitely an employee. Once they are working on a set schedule you are looking at an employer - employee relationship.

-Steven

Sam M. · Answer

Steven Hamilton II

Those are some excellent points!! I appreciate them.

I guess how do I make sure that if I am paying this person as an independent contractor that I don't get into any issues down the road. I am planning to get an office and have this person operate from the office 5-6 hours per day.

Steven Hamilton II · Answer

Sam M.,

I would consider that you definitely need to have an umbrella policy for yourself, Also go the route of being sure that you don't commit too far into this person if you need to get rid of them.

What type of work is being done?

You are looking at an added cost of about 6.2% Social Security, 1.45% Medicare, 4.15% employer contribution for Unemployment Insurance benefit contribution rate.  Plus whatever your cost is for Workers' compensation, then you have additional general liability insurance.  Often a 14/hr employee costs 25-35% more than the rate.

-Steven

Sam M. · Answer

Steven Hamilton II

Thank you!! I live downtown in the loop.

He does do some similar work for others, but only if he is not occupied with my work. I don't carry insurance for him. He doesn't carry any insurance of his own. I have general liability insurance.

I pay him $10/hr

I understand that, but I read the IRS regulations on Employee vs Independent Contractor and it sounds like he is more of an Employee.

Can I hire him for like 35 hours or so? 7 hours per day? Does that make any difference?

So including unemployment insurance, we are talking about roughly 10% in additional cost?

Thanks for that!

Steven Hamilton II · Answer

Sam M.,

Welcome to the forum.  I'm from the north burbs near Gurnee.

Define full time? Does he do any work for anyone else?  Do you carry insurance for him? Does he carry his own?  What about liability?  It is distinctly possible that he could be an employee instead.  You have to be careful especially if he goes to apply for unemployment at some point.

The extra cost depends upon their pay rate.  Typically someone who is being paid as an independent contractor receives a higher gross as you do not have to pay the added Social Security and Medicare (6.2% and 1.45% respectively).

1) Payroll is only for employees. For independent contractors you simply cut a check just as you would pay any bill.

2) Are you sure you need to hire him full time?  Consider that maybe he needs to be paid outside of that fact.

3) Contractor vs. Employee.  You are looking at added Social Security and Medicare (6.2% and 1.45% respectively), You also have unemployment insurance, additional tax returns to file for employment taxes.

4)  A great payroll system that is easy to use is  Intuit's Payroll. Go through an accountant and you could see lower billing than doing it yourself.

-Steven