Five Mistakes Business Owners Make While Hiring

FIVE MISTAKES BUSINESS OWNERS MAKE WHEN HIRING

When you are hiring team to work for you, you have to be certain as to whether you should hire them as an independent contractor or as a full-time employee. Unfortunately, this decision gets more small business owners in hot water with tax issues, quite often more than any other decision you will typically make in your business.

It is absolutely mind boggling.

I will never forget my client, the licensed handy man, who landed a maintenance and repair contract with one of the largest donut chains in the United States. He only had the Southern California region but it was enough to make a significant financial impact to his business. He started getting more work than he could handle and he needed to hire someone. Against my advice, he hired a friend as an independent contractor.

The friend had an accident on the job location and cut his finger to the point of needing surgery to repair it.  My client paid him the entire time he was off work.  On the day he hired him, they agreed he would be an independent contractor and not an employee. But let me caution you here, just because you agree on paper or verbally to the terms employment classification does not mean the law will agree with you.

On the day you terminate services or the day something happens, an independent contractor may get reclassified as an employee in the eyes of the law. Here are some simple dos and don’ts when hiring:

• Don’t let the amount of time a person works for you determine if he or she is an independent contractor.  Whether that person works four hours a day or two days a year, time is not a factor when determining if this person is an employee or not.  We often here the term – day labor.  This is an old term to mean I only have this person work for me today based on my work load.  This is a huge myth and one you want to avoid.
• Don’t make cash payments to workers.  Often times you will here individuals telling you to pay them under the table. Meaning if you pay me cash then I will not report it and you don’t have to report it either. This is one of the worst things a business owner can do. When you pay someone cash, you have no record of paying that person at all. If that person gets hurt on the job, the very first question the hospital will ask will be: Is this a work related injury? Now you have not only a labor board issue, but you have opened the door to a payroll tax issues and a worker’s compensation issue.  You will have three state departments knocking on your door and wanting money – a terrible predicament.
• Don’t think if you pay them less than $600 per year you can get away with them being independent contractors. This is still not the case. If you pay someone less than $600 per year and they are a true independent contractor you will not have to issue a form 1099.  The $600 threshold does not determine if a person is an independent contractor.
• Do your research regarding current laws on an independent contract versus an employee. In most states, if you have control over the person’s work, you tell them where to be and how to do their job chances are they are an employee.
• Do make sure you have a signed independent contractor agreement that requires the contractor to do a certain task to be completed by a certain time. The less control you have over their work the better chances they are an independent contractor. If they have their own business and, like you, they can make have a business profit or a business loss then chances are they may be an independent contractor.

You always want to make sure you classify your team correctly because the costs of not doing it right maybe more than you can bare. When my client’s “friend” got out of the hospital, he filed a lawsuit against my client and the donut shop where the work was being done.

Guess what happened?

My client lost his contract; he owed back employment taxes, and had to deal with the California’s Workers Compensation Board. The end result was financially devastating.  Remember, as a business owner, not only do you have to seek great advice, you are also saddled with following that advice.  Once you know better, you have to do better.

Karla Dennis

As seen in Forbes Magazine, Karla Dennis is an expert tax and business strategist. As an enrolled agent, Karla is licensed to represent taxpayers in all 50 states. She holds a Masters in Taxation and Business Development and is the author of two books, Tax Storm and Against the Odds.

Karla, CEO of consultancy firm Karla Dennis And Associates, Inc.™, has saved her clients thousands of dollars and has been featured in various media outlets such as Forbes, MSNBC, KTLA, Yahoo! Finance, and SmartMoney, marking her as the ultimate tax expert.

As of 2014, Karla became the new host on the “Mind Your Business” radio show, KTLK AM 1150, sharing her financial and business knowledge with the greater Orange County and Los Angeles areas. As a supporter of women’s rights and issues, Karla is part of the Women Network, an organization built to educate and mentor women. In addition, Karla is the radio host for Women Network Radio, a show that aims to uplift and empower women of all walks of life.