Depending on the nature of your construction business, you may have workers who are employees or contractors, or you may have both. Each has its merits, but it's important to review which are to meet your tax obligations.
With so much discussion about employees, payroll, and payroll taxes, you may feel like missing out by not hiring many employees. The reality is that as a small business owner, you do not have to hire employees.
To hire or not to hire employees is one of the few optional things where the business owner can choose, change their mind, and change direction as needed.
When you have an employee, you must withhold income tax and report on additional benefits. Contractors generally look after their tax obligations.
Is there another way?
Yes - to outsource most of the mundane low-value tasks that take time away from what you are skilled in. As the owner, you can use that time to meet with clients, create estimates, collect money, pay bills, and have a little left over.
It's against the law to treat an employee as a contractor. Significant penalties apply if you do, so it's essential to get it right.
The simplest way to remember is:
An employee works in your business and is part of your business.
A contractor is running their own business.
But how can you be sure that you've got an employee or a contractor on your hands, especially with remote work blurring the lines between employees and contractors?
Does it come to the point that you should be hiring a worker as an employee when you thought they were a contractor?
There are six factors to consider:
1. Ability to subcontract or delegate
An employee is not able to subcontract or delegate the work. They must perform the outlined tasks themselves. If they can't do the work themselves for any reason, say a prolonged illness, and someone else does it, this is a substitution. Your business would then pay the other person to carry out those activities.
A contractor can delegate the work as long as they're not obligated to do it themselves per the contract. If your contractor didn't work, they would arrange for another qualified person to do it. You would pay your contractor, who would then pay their subcontractor.
2. Basis of payment
An employee is paid a set amount per period. The most obvious example would be an annual salary or hourly wage.
Some employees are paid piece-work rates. They receive an amount per successful sale or per the number of pieces produced. A commission basis would be a price-per-item structure.
A contractor, however, is paid an agreed-upon price in exchange for a predetermined result. Some contracts may specify the amount to be paid in increments as stages of the project are completed. But the key takeaway is that a contractor is paid when the agreed-upon result is achieved.
3. Equipment, tools, and other assets
If your business is responsible for providing the equipment, tools, and other assets required to perform the job, that's characteristic of an employee.
If the worker is providing these items, they are likely a contractor.
4. Commercial risks
Employees do not bear the commercial risk and are not liable for correcting any defects in the work at their own expense. Instead, your business takes this responsibility. The worker will be paid for the time required to complete the task.
A contractor assumes commercial risk. They are responsible for fixing any mistakes on their own time. Your business does not have to pay for any extra time taken or materials used unless otherwise specified in the contract. This additional work would fall under the umbrella of the terms set at the beginning of the project.
5. Control over the work
Employees have to complete the work the way the employer specifies. What work is done, where it's done, how it's done, and when it's done are all up to the employer. The employee then completes the work as required.
Contractors are not subject to the same rules. They decide when and how the work is done, so long as it meets the obligations laid out in the contract. For example, a contractor could work three 10-hour days rather than four 8-hour days to complete a job.
6. Independence
An employee works within a business. They complete tasks as required until they leave the job.
A contractor operates independently and may have other contracts with other companies. They can freely accept and refuse other work. Their obligation is complete when they deliver the specified outcome.
Final thoughts
Don't add staff just to have staff. Employees are expensive. In Washington State, it is mandatory to offer Family Leave and PTO. Family Leave is similar to State Unemployment which is calculated on gross wages. PTO (Personal Time Off) is at a rate of 1 hour per every 40 worked. The employee can use the time off anytime they want – no notice given) Other benefits may include paid vacation and holidays.
Most construction company owners like you are doing what they can to survive and thrive in tough economic times, and we are here to support and hopefully help you stay out of trouble where we can.
It can be confusing to determine between an employee and a contractor, but it's crucial that you do so to meet your tax obligations and play by the rules. Contact us to learn more about your tax obligations for employees and contractors.
P.S.
Here's a Promo Code that you can use in both our Fast Easy Accounting Store and Construction Accounting Academy for a 40% Discount:
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You can use it today, November 25, up to Sunday, November 27, 2022, at 11:59 PM. (Please note: Offer does not apply to Outsourced Accounting, Bookkeeping Review, or any Consultation and Training products; you can use it, however, to purchase any course or monthly subscription classes in Construction Accounting Academy).
For questions, suggestions, or comments, email me at sharie@fasteasyaccounting.com or call me at 800-361-1770 or 206-361-3950.
I look forward to helping you with your business goals.
About The Author:
Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits so they can put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com
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