Choosing whether to hire employees or independent contractors for your mobile car detailing business is a serious decision. The decision is an important one because of many factors. One of the most important reasons you want to make the proper selections is your end-of-year tax liability. If you misclassify an employee as an independent contractor, many repercussions could follow. In states such as California, employees can bring lawsuits against the employer for the collection of overtime compensation and attorney’s fees. Additionally, the Internal Revenue Service (IRS) will impose a penalty against the employer of 1.5% of the wages, plus 40% of the Social Security and Medicare taxes, which were not withheld from the employee’s paycheck. Ensure that you understand the difference between the two classifications before making your selection. Once you know the difference between the two classifications, you should look at the benefits of each classification. Then, follow your review of the benefits with a review of the disadvantages. Once you have reviewed the positive and negative aspects of each option, you will be able to make an informed decision regarding which option would best suit your mobile car washing business.
Independent Contractor Versus Employee
There are several factors that differentiate an independent contractor from an employee. How you classify your worker will determine whether you withhold income taxes on the worker and if you will be required to pay Medicare, Social Security, and unemployment tax on paid wages. If a worker is classified as an independent contractor, typically, an employer is not required to withhold or pay taxes on wages paid to them. A worker is an independent contractor only if the employer directs the result of the work, not how the work is accomplished. The IRS sets forth three categories to review to determine the proper classification for your workers. The three categories to examine are Behavioral Control, Financial Control, and the Relationship Between the Parties. Each of the three categories are especially important for small businesses to keep in mind who may believe that classifying workers as independent contractors will result in lower taxes.
Behavioral Control
Behavioral control involves whether or not your car washing business will have the right to direct and control your worker’s work. This may seem confusing, but there are several examples that can assist you in understanding whether or not you will be exercising behavioral control over your workers. First, you need to determine, when you give instruction to your workers, will it include specific times when they have to work, exactly where they must work, and the particular tools they must use? Second, when you are providing instruction to the worker, how detailed is the instruction. The degree of instruction being more detailed indicates the worker is an employee, not an independent contractor.
Conversely, less control would be demonstrated through less detailed instructions, indicating that the individual is probably an independent contractor. Third, you want to review how you evaluate your workers. Does evaluation include only the end result of the job, or does it also measure how the end result is accomplished? The latter indicates an employee as those types of evaluations are indicative of control over how the end result comes to be. Finally, the amount of training that is provided to a worker is also a signal that can differentiate between whether you should hire an employee or an independent contractor. An employee likely receives periodic training concerning procedures, while independent contractors typically use their own methods.
Financial Control
Financial Control is the second category to review when deciding whether to classify the worker for your mobile car washing business as an employee or independent contractor is to determine whether your company can direct and control the business and financial portions of the worker’s job. For example, did your business purchase the equipment that is used by the worker on a daily basis. This means that you have invested in the worker in the form of the equipment. If a worker is likely to incur a large number of unreimbursed expenses, they are likely an independent contractor as an employee would have an employer to reimburse them for specific costs relating to their job functions. Though your car washing business may be small and not employ a non-compete agreement, this is a huge factor in determining if a worker is an independent contractor or an employee. Employees are typically subject to non-compete agreements, whereas independent contractors are generally free to work for whomever they choose. An even more significant aspect of financial control that assists in determining if a worker is an independent contractor or an employee is to review how they are paid. For independent contractors, payment is generally based on a per-job flat fee. For employees, they are typically paid at an hourly wage or a salaried annual amount.
Relationship
The final category to review in deciding whether to hire an independent contractor or an employee for your mobile car washing business is to look at the relationship that will take place between the worker and the company. When reviewing the relationship between the employer and the worker, is there a contract that specifically states each party’s role in the relationship? Does the contract explicitly define what each desires to obtain from the relationship? Even though just having a contract alone does not make it legal, it can provide support for proving classification. You must also review whether or not benefits are provided to the worker. Benefits can include anything from a pension plan to insurance or sick pay and vacation pay. Independent contractors generally are not privy to these types of advantages, which would assist you in determining whether to hire an independent contractor or an employee. Another critical factor to look at within a business-worker relationship is the permanency of the relationship. If you hire an independent contractor, typically, the association is meant to be short-term for a specified period of time. Employees, on the other hand, generally have the expectation of the work continuing indefinitely. You also want to look here and determine the kinds of services you provide and whether or not the services the worker performs are considered vital parts of the business’s regular functions.
Reviewing the Benefits of Hiring an Independent Contractor
Now that you are familiar with the differences between an independent contractor and an employee, you want to take time to review the advantages of choosing to hire an independent contractor. Hiring an independent contractor can be a great choice depending on the needs of your business. The most significant benefit of hiring an independent contractor will be that you are paying less out-of-pocket expenses for worker benefits. You will save money by not spending on state unemployment compensation and worker’s compensation insurance, and Social Security and Medicare taxes. This can result in a decrease in payroll costs by nearly 20% at times. In addition to the financial savings, choosing to hire an independent contractor also means that you have greater flexibility in terms of staffing. It is much easier to hire and let go of independent contractors than it is to do so with employees. This allows you greater flexibility and choice in which workers you use for which jobs. Choosing to hire independent contractors also means that you will be less likely to be exposed to lawsuits. This is because employees have many legal entitlements and rights available that are not required for independent contractors.
Reviewing the Benefits of Hiring Employees
Hiring employees instead of independent contractors has many advantages. First, hiring employees provides your workers with a sense of job security in that they can feel safe in the belief that their job will be continuous and not limited to a short period or project. Additionally, hiring employees is often more cost-effective because independent contractors cover most of their own fees, thereby charging higher prices for their services. Hiring employees also provides the benefit of requiring less training. Independent contractors come and go meaning that each time you get a new independent contractor, you have to teach them all of your favorite methods for doing things. If you hire an employee, you can train much less often because the employee will be there for a while, giving you more time to focus on the business overall.
Reviewing the Disadvantages of Hiring an Independent Contractor
When you hire an independent contractor, there are going to be some disadvantages. While you may save some financially and have greater flexibility, there are still some things that will not work in your favor. The first disadvantage is that the control you have over your worker will be minimized. Unlike employees, you cannot provide the same kind of supervision and monitoring over independent contractors. In addition, independent contractors are able to work independently with their own style and choice of methods which may not always align with how you want tasks to be accomplished. Another disadvantage is that it will be a revolving door of workers because independent contractors work on short-term projects before moving on. Generally, if you hire an independent contractor, it will only be for a specific job or project or a designated time.
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Join Facebook GroupReviewing the Disadvantages of Hiring Employees
Hiring employees does also come with some disadvantages. First, employees will likely want your mobile car washing business to provide benefits that will be costly to your company overall. You will have to compete with other companies who may give the workers the benefits that they are seeking. This means that if you want quality workers and want to hire employees, it may cost you a little more overall due to the additional cost of benefits. Second, if you choose to hire an employee, you will be responsible for the paperwork necessary to withhold taxes from your worker’s paycheck and tax withholding, and Social Security and Medicare tax withholding. You must ensure you complete this process correctly, or you could be responsible for hefty fines. Finally, depending on the state you reside in, you may be responsible for the licensure and training of your employee, which of course, results in additional financial costs.
Overall, hiring an independent contractor or hiring an employee depends on various different factors. First, you will need to review your mobile car washing business to understand your business’s specific needs. You then want to determine which classification best matches based on those needs and the categories provided by the IRS. As a mobile car washing business, you will likely begin with one or two workers. Picture in your mind a typical day and how you would want that to go. Would you like a set schedule where the worker needed to be at a particular place at a specific time, or would you want them to choose their own schedule? Would you be okay if they detailed vehicles using their own chemicals and methods, or do you want them to follow the process you believe is best for detailing a car? Each of these questions will allow you to determine which classification is the choice that will provide optimal results.
Knowing what you know about independent contractors and employees, you will likely want to begin with a single employee so that you continue to maintain control over the process which is used to detail vehicles. If you are going to require your workers to obtain certification as a detailer, having them as an employee will place that responsibility on you. Despite the burden being placed on you, it is also a good thing because you will always know that your workers are up to date with whatever training is necessary to maintain their certification. Since the work completed will reflect the business, having an employee allows you as the owner to maintain overall control of the company and how the business is perceived by the public. You want your business to grow, and it is best to choose a more permanent solution that can grow with you.
