Hiring for your small business? One of the first decisions you’ll face is who to hire and how to classify them. Should you bring on a W-2 employee or a 1099 independent contractor?
In this episode of Small Business Smarts, ADP’s Laci Buzzelli breaks down the key differences between the two and when each option makes the most sense for small businesses.
For more information, visit ADP.com/SPARK
Victoria Jordan, founder of PureWork Studio
When small businesses grow, owners have to declare what type of workforce mix is best for their business. I'm here with Laci Buzzelli from ADP to discuss what to consider when it comes to worker classification.
Hey, Laci
Laci Buzzelli, vice president and general manager of small business services, ADP
Hey, Vicky.
Victoria Jordan
So I'm excited to connect with you. I have very good news. My business is growing, but the amount of work I have still fluctuates. I need to bring on help, but I need to do it without overcommitting. Do you have any advice for me?
Laci Buzzelli
First of all, Vicky, congratulations on growing your business. But it's such an exciting time and encouraging point for not only you, but so many business owners out there like yourself. But I also know it can be very overwhelming. The first thing I encourage you to do is consider the type of help that you'll need. Is it a traditional employee or is it a 1099?
Laci Buzzelli
It's really important that you properly classify your workers, or you could be liable for penalties.
Victoria Jordan
That's good to know. I definitely don't want that. So how do I, ensure that I'm classifying my workers the right way?
Laci Buzzelli
That's a great question, Vicky. And the right question. How you classify your workers is based on whether the worker meets federal and state tests for independent contractor status. So let's unpack some of those main differences. An independent contractor, or 1099 worker, generally runs their own operations and has many customers that they work with. They take care of their own business expenses and they're responsible for paying their own taxes.
Laci Buzzelli
They also do not receive any employee related benefits. If it's specialized, project based, or something that you only need and burst. That's where freelancers or independent contractors might be the right fit for you. Again, as long as those tests are met, the second worker type that you can consider is a W-2. They're hired for ongoing work in the business and will be on the company's payroll and have taxes withheld from their pay.
Laci Buzzelli
They're also eligible for benefit offerings. I know that was a lot, Vicky, but did that help?
Victoria Jordan
Yes, it definitely helps. So with my creative studio, someone who's with me all the time managing all our projects might be considered an employee versus, say, a motion graphics designer who I would hire for specific projects as long as that motion graphics designer meets all of the tests and they could be considered an independent contractor. Did I get that right?
Laci Buzzelli
Yes, you got that right. And if they don't meet the criteria, then it's best to classify them as an employee, where they'd be entitled to all the rights and benefits of employees. And remember, there are great resources out there to help guide you. Check out IRS, the Department of Labor, and all of your state laws for guidelines to help you classify who's a W-2 or a 1099.
Victoria Jordan
Thanks. That's very helpful. I definitely don't want any surprises.
Laci Buzzelli
Exactly. I know that's the last thing you want is a business owner, and it's also best to practice a periodic zoom out to audit any long term contractors to make sure they still meet contractor criteria and haven't drifted into defacto employee status.
Victoria Jordan
Thank you so much, Laci. This makes a lot of sense. A good rule of thumb for small business owners. Match each role to the right worker type, and have regular check ins to ensure that your worker mix is working for you. Go to ADP.com for more.
