Deciding to onboard a freelancer, also known as an independent contractor, requires understanding the tax and financial implications. Following are some considerations as you determine what works best for your business.
What to expect when you hire an employee (W-2)
You will be responsible for withholding taxes from the employee's paychecks:
- Federal and State income taxes
- Social Security
- Medicare contributions
Employers are also responsible for contributing an equal share to Social Security and Medicare taxes, which equates to 7.65 percent per employee. Learn more about your employer payroll tax responsibilities here.
Additionally, employers often provide benefits such as health insurance and retirement plans, which not only benefit employees but are also business expenses.
What to expect when you onboard a freelancer (1099)
Freelancers are self-employed, meaning they must calculate and pay their own taxes. However, any payments you make to freelancers are a business expense, giving you an opportunity to reduce your business's taxable income.
What to consider before hiring
Consider the nature of the work. Freelancers are generally best for specialized or short-term projects. An employee can help benefit the long-term business functions. The cost implications of freelancers are lower since you avoid employer taxes and benefits along with the burden of managing payroll and tax withholding, but hiring employees may provide greater control and consistency within your workforce. Consider and balance your short-term needs and goals vs. your longer-term needs.
The importance of proper classification
The IRS pays attention to how you classify the people who work for you. Misclassifying your employees as freelancers or vice versa could result in penalties and complications with the IRS. Errors can result in costly outcomes and legal repercussions, especially when considering employee benefits and how they are taxed. To better understand taxable and nontaxable employee benefits, read our detailed guide.
If you are unsure which path is best for your business, consult with your R&A advisor. We are here to assist you.
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