Hiring an Independent Contractor vs. Employee (1099 vs. W2)

Houston, TX CPAWhether to hire an independent contractor or an employee is a commonly asked question by Entrepreneurs. There are many costs and benefits with either side, so the decision must be aligned with your Company’s goals.

Hiring a contract worker can help your company reduce its payroll obligations, have flexibility in hiring and firing, and gain experienced assistance with specialized skill. They can be hired for a specific job scheduled for a short period, or for a job that could take years, such as setting up an IT network system, or the construction of a building.

Hiring a contractor with a specialized skill also means that they will cost more per hour and will most likely be working on multiple companies similar to yours at the same time. However, if the job is temporary and specific, it may be cost effective to pay for the convenience of flexibility and skill than to hire them permanently if you do not see the need to hire the contractor for the long-term.

Employees are the heart of every company. They perform duties dictated and controlled by upper management, are given on the job training, and work only for your company. And if things really work out well, they will become loyal ambassadors of the company and be motivated to help the company grow. They will likewise work to build relationships with their co-workers as well as the company’s clients.

It is also important to highlight that if your company employs independent contractors to perform work outside the state your company is domiciled, there is a risk of creating nexus in such states even if the contractors are not employees. Accordingly, the company may be required to file state income tax returns.

The rules for determining nexus for state income tax are more complex than the rules regarding nexus for sales tax. Each state has its own set of rules. Some have even noted that physical presence in their state is not enough to determine nexus and assert that nexus can also be established by means of “economic presence.” If your company is in the position of providing services in other states, or is in the process of deciding to branch out into other states, it is best to talk to a Tax Advisor to understand the potential tax consequences in each state.

 

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