Every business owner goes through the process of deciding how to hire someone when they get to the point where they’ve outgrown their current situation or just need a bit of extra help.  You’ve found the right candidate and now you need to decide whether or not to hire a contractor or employee…this is where you need to be very careful!

Watch out for the pitfalls

While your first inclination is to hire contractors to save paying FICA and Workers Comp, you should be aware of the rules that the IRS and state can nail you on.  Yes, there may be two sets of rules that you have to abide by!  We’ll explain each one, and since we live in California, the rules here as well.

What the IRS Looks For

The IRS is mainly looking at two factors; Control & Relationship.  Control is what it sounds like, do you have control over how your worker does their work and when they do it?  Do you determine how much you pay the worker?  If the answer is yes, then you most likely have an employee, not a contractor.

Under the Relationship test, does your relationship with your worker resemble an employee or contractor?  Are there written agreements, do you pay for benefits, do you reimburse your worker for expenses?  If it walks like a duck, quacks like a duck, then you most likely have an employee.

Under the Control test, you give up when and how the worker perfoms the work. For example, you take your car to the mechanic for some work.  You walk in and the mechanic tells you how much it’s going to cost and how long it’s going to take to do it.  Now you’re hoping it’s fast because you need to pick up the kids, but you can see what I’m getting at here.  You really don’t have any control over the mechanic in how and when they do their work.  In this case, we’re describing a contractor relationship.  

California

In California, we take it to another level! Oh, how we love the Golden State! New legislation for 2019 enacted more rules for determining contractor status.  (Even if you’re not in California you might as well take heed as I’m sure states will soon follow California’s lead)

California gives you the “ABC” test to help you determine whether or not you have a contractor or employee relationship:

A – Control

This refers to whether or not the worker is free from the control of your business in connection with their performance of the work. Thus, if you are telling the worker when and how to do their job then you are probably going to fail this test.

B – Business

Additionally, the worker should be performing work that is outside the normal course of your business.

C – Customarily Engaged

In connection with A & B, the workers must be engaged in an established trade or business of the same nature as the work performed.

Summing up California

Photo by Vital Sinkevich on Unsplash

As you’re now most likely thinking about what this means for your business, these new rules rule out a lot of what has gone unchecked for many years–hiring just anyone to get around payroll taxes and workers comp insurance. To illustrate, here are a few examples:

Example 1: You run a personal training studio and hire other personal trainers to come in and run training sessions. That’s an employee.

Example 2: You’re a physician in private practice and you hire office staff. This is an employee because they will most likely fall under the “Control” test.

Example 3: You’re a church and you hire a consultant to help you with leadership and other efficiencies. That’s a contractor.

Example 4: You’re a real estate agent and hire a transaction coordinator to help you move all your listing and sales through the administrative pipeline. But they work from home and you don’t dictate their schedule. You can most likely get away with hiring them as a contractor.

These rules can be tricky…no matter what state you live in

The worst thing for you to do is to guess at these rules. Feel free to reach out or comment if you find yourself stuck and caught in the web of employee vs. contractor rules!

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How to Choose payroll service blog post

Whenever I mention payroll to business owners I see the telltale signs of them “checking out” mentally, and it’s not surprising!  With terms like FICA, Workers Comp, Unemployment and ObamaCare, it’s no wonder small businesses are confused and sometimes just downright disgusted by it.  In fact, we often tell clients that if they get one thing right in running their business, make sure you hire a competent payroll service!

We want to help you understand how to make the right choice in choosing a payroll service.  So let’s get into it!

Taxes

Penalties on payroll tax errors are some of the most stringent that the IRS will shell out.  So you need to get this right!  Payroll companies will work payroll taxes in one of two ways: impounding and you paying the taxes yourself.

Impounding means that the payroll company takes the taxes from your account, holds on to them, and then pays them on time to the IRS and state agencies.  Sure, they make money on holding onto your funds, but they also take full responsibility for making the payments on time.

Some providers make it pretty easy to pay the taxes yourself via ACH and electronic payments.  However, it’s up to you to press “Submit” and make them on time.

The Verdict:

Use payroll services that impound.  It’s easier to manage cash flow because the taxes are taken out right when you run payroll and the payroll company assumes the responsibility to make the payments on time.

Direct Deposit and Checks

This may seem like a pretty basic thing but did you know that you can save yourself some time and costs by ONLY offering direct deposit?  Direct Deposit is a great way to pay your employees because they get paid right into the accounts.  Checks can be used, but they also create a headache when it comes time to reconcile your bank account.  Payroll companies also charge to push that paper around.  Have employees that don’t have a bank account?  Give them a “Pay Card’ that has it’s own routing and account number and you can “load” it with their pay each pay period.

The Verdict:

Use a payroll service that focuses on direct deposit and you will most likely save money on monthly service fees, postage and mailing, and time when reconciling your bank account.

Integration with Other Apps

Do you use accounting or online scheduling software like Xero or Deputy?  Use a service that ingrates with them to eliminate data entry and make running payroll, easy.  If using online scheduling, within a few clicks you can approve timesheets and send them straight to payroll.  This alone can save you hours each pay period.

The Verdict:

Search out payroll services that are open that integrate with other apps that you use.  Who knows, you may even discover an app you can use for your business this way!

Advanced HR Features

Some businesses have 1-5 employees, some have 50.  And depending on how many you have, will determine how much help you’ll need managing them.

If you have a large staff to manage, payroll companies like ADP have robust services beyond just running payroll that offers on-site HR reps that can come out “do your dirty work” for you, a.k.a.hire and fire.  They can also help you navigate the tricky waters of the ACA (ObamaCare) and provide employee handbooks, amongst other things.

If only a few employees, then a company like Gusto is often a good choice.  While they don’t provide robust HR services, they can offer very competitive rates on Workers Comp insurance, and make managing your employees pretty easy.

The Verdict:

Make a choice based on your payroll needs and employee size.

Pricing and Cost

This is what it boils down to right?  There are two methods that payroll services use to charge their fees: a flat fee per month, or fee per pay period.

Flat fee per month gives you a predictable cost each month.  Generally, there is a base cost and then a per-employee-per-month cost.  So as long as you know how many employees you’re paying, your fee is pretty predictable.  And, these companies don’t charge for anything extra like W-2’s and quarterly reports, as long as you are a subscriber.

Per-pay-period providers charge each time your run a payroll.  For most businesses, this is twice per month.  They will also charge additional fees for W-2’s and quarterly reports.  There are also other charges for mailing checks, etc., so make sure you have the payroll service spell our EVERY thing that is going to cost before you sign up.

The Verdict:

Use a service provider that charges a flat fee per month.  There is less confusion on fees and it’s generally cheaper each month.

Make it Happen!

As you can see, there’re lots to consider when choosing the right payroll service provider for you.  We can help you make that choice and get you in touch with the people to make things happen.   Have questions, leave a comment or reach out to us on our Get In Touch page and we’ll be happy to help you make the best decision for you and your business.

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