Many business have looked at the cost of hiring an employee versus a freelance worker and have decided to classify them as a 1099 worker to save money. Unless the worker actually qualifies under IRS and state guidelines, I don’t recommend you do this. The IRS began auditing businesses looking for mis-classifications, and the penalties and interest you’ll have to pay will be much higher than any cost savings you will gain by classifying the worked as an outside contractor.
Let’s first look at the costs you incur if you hire the worker as an employee.
- Of course the first cost is the hourly wage or salary to be paid
- Payroll taxes which include social security, Medicare, federal unemployment as well as any state taxes that apply. In CA those taxes are unemployment and ETT. Each state has it’s own employer taxes, and they can change from year to year. Some states (as in CA) have rates that are different for employers. Make sure you research the current tax rates so you know exactly what you will pay when you hire an employee.
- Worker’s Compensation – the insurance you pay based on the wages and types of work performed
- Business License renewals – some cities’ licenses are based on the number of employees, or the wages paid. If this is the case for your location, your total fee will increase based on your particular city’s calculations.
- Overhead – you may have to purchase additional equipment, pay another user or license fee for software, etc
- Benefits – perhaps you’ll have to pay medical insurance premiums, offer vacations, or other fringe benefits.
As you can see, there can be a lot of additional expense when hiring an employee. There are probably other costs I haven’t even put down that may come into play. However, putting someone as a 1099 worker to save on these costs (or because the worker asks so they take home more money) is not a good idea, nor is it allowed.
In the next post we’ll look at the guidelines the IRS uses to determine if a worker is an employee or a contractor.
Have questions about this information? You can reach us at 310-534-5577 or [email protected]
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