“Should I hire employees or independent contractors?”
It’s one of the most common questions we hear. First off – congratulations. Pondering the hiring plunge is often a good sign of your business’s health. But growth can be stressful, particularly when it involves taxes and paperwork. Compared to the IRS, dogs are easy to understand. We’re here to help.
Many first-time employers are tempted to go the independent contractor route, having heard it’s easier and cheaper. Maybe you have dog pro peers using IC’s. But make sure you know the implications of your choice, as the legal consequences carry weight.
What’s The Difference?
Employees are considered official, long-term hires, and they come at a higher cost, as you are responsible for half of their Social Security and FICA taxes, as well as payroll taxes, not to mention workman’s compensation insurance. So a $10/hour employee will cost you more than $10/hour. How much more depends on a number of factors including your location, but you should figure at least a couple of dollars more per hour.
All of this tax and insurance business requires more paperwork, too, though it’s probably not as complicated as you fear, and there are tax pros and payroll services to help.
In some states, local laws make it more difficult to fire an employee than an independent contractor. This varies considerably state by state, so it’s worth your time to research or ask an expert.
With these added costs and complexities, however, come some significant benefits. You can train an employee in the style and procedures you prefer. If desired, you can also require that your employees not work for a competitor. This means, for example, keeping the best class trainers for yourself.
Independent contractors are a different animal altogether. IC’s are simpler and less expensive to hire. There’s much less paperwork involved and you pay no taxes or workman’s comp: $10/hour is $10/hour.
Unfortunately, the IRS would prefer you not to hire them. They get less money when you hire an IC, and it’s easier to commit tax evasion, payment-under-the-table being the most common method. To discourage use of ICs, the IRS uses a very narrow definition of what constitutes an independent contractor.
The chief thing to understand is that an IC must be a professional who owns their own licensed business, and who contracts only a portion of their time to you. They are free to contract the rest of their time to other businesses, including your competition, and to the public as well—which means that they must remain free to compete directly with you.
And that’s only the beginning. Here are other rules dog pro business owners will have difficulty not breaking:
- You can’t train an IC; they should be professionals in their own right, fully formed and skilled at the job they’ve been hired for.
- You can’t provide them with materials for the job. Which means groomers have to bring their own shears and trainers should teach their own class curriculum.
- Their term of employment should be finite, not ongoing.
- They should not be doing work that is your primary source of revenue. If you run a dog walking and pet sitting business, this means no independent contractors to walk dogs or do pet sits.
This is only a sampling of the IRS’s rules of engagement; there are nearly 20 of them. And you only have to break one to be found guilty of tax fraud. In short, there’s almost no way for a dog pro to legally hire an independent contractor to provide services for dogs.
Which doesn’t mean the desire to go the IC route isn’t understandable. We get it. And chances are you know other dog pros using ICs. But pointing at the groomer down the street when the IRS comes for you won’t get you far; the IRS makes it very clear that claiming precedent doesn’t fly.
If You Get Caught
If you’re audited, the IRS will likely demand the taxes you would have paid had your IC been an employee, as well as interest owed on those taxes. Not to mention a probable fine. A little math will tell you that the longer you used an IC illegally, the more you’ll owe Uncle Sam.
Will I Get Caught?
Statistically speaking, you aren’t likely to be audited. But paying money to the same ICs year after year could get you flagged, particularly if the sums are equivalent to local salaries. You could also land on the IRS’s radar if an IC files a complaint against you with the Department of Labor.
Again, the odds are against exposure. But if you did get caught, the result could be catastrophic. We know of dog pros who, pushed into bankruptcy, have lost their businesses (which, by the way, won’t pardon those taxes).
Boy Am I In Trouble
If your stomach has been sinking reading these words, there’s no need to panic. What’s done is done, and now you know. If your use of ICs has fallen outside of legal boundaries, there’s no time like the present to bring your ICs on as official hires. The longer you wait, the steeper the potential costs. So take the leap into full-on employment. Yes, you’ll pay a little more, but consider it money well spent for a good night’s sleep and the benefits that come with employees.
But I’m Not Ready
If you’ve yet to hire anyone for anything, and/or are still uncertain about taking on a full employee, consider these alternatives:
- Hire an independent contractor for a short period of time—say, 6 months—as a trial. If you like them and their work, play it safe by transitioning them into full employment.
- Get creative. Consider an internship program as an alternative—you get assistance and your intern gets valuable job experience and training. This is also a great way to audition potential hires.
- Find professional help for non-business tasks such as child care, housecleaning, and errand running. Help in such areas can free up more of your own time to devote to the business.