Navigating the Hire: Choosing Between Contractors and W2 Employees to Master Business Growth

Ever tussled with the tough decision of whether to hire contractors or W2 employees for your business? You're not alone. This episode is a deep dive into the intricate world of hiring, offering a clear distinction between employees and contractors, and their respective roles. We illuminate the shades of gray that often cause confusion, such as control, exclusive work range, set hours & locations, equipment & tools, and payment structure. Misclassification isn't just a minor error - it could land you in legal hot water, so it's paramount that you understand the differences. 

Moving along, we venture into the land of group and solo practice owners as we share golden nuggets on creating a successful group practice. The choice of hiring contractors or W2 employees significantly impacts the dynamics and structure of your practice, so we'll be providing some insightful self-reflective questions to help you make an informed decision. Whether you're a seasoned business owner or just starting out, this episode is guaranteed to equip you with valuable insights. So, ready to make the right hiring decisions for your business? Let's get started!

Transcript

Speaker 1: 0:00

Very common question we are going to address today Should I bring on contractors or should I hire W2 employees? Today we're going to be talking about the differences, how to classify them both. We're going to dive into what each of them mean and how they differ. And then we're going to talk about misclassification and how misclassifying and putting labeling like a contract or an employee, a contractor when they should be employed, where that can get you into trouble and why you want to be careful. And then we are going to end with some self-reflective questions to help you to understand if you are someone who should be considering W2 and move forward with that, or if contractors are the way to go for your business. So, without further ado, let's get into it. So what is a contractor? Contractor you can also. It's also called the 1099 and there are few traits that classify people as contractors. So to define this, it is independent individuals or entities hired to complete specific projects or tasks within your business. So independent individuals or entities that are hired to complete, like specific projects or specific tasks that you may have. The second thing is they work on a contract basis with a defined scope of work and they often bring their own tools and their own resources. Number three contractors are responsible for their own taxes and benefits. So those are the three defining characteristics of a contractor of a 1099. You have someone coming in who is a separate entity, who has their own LLC, who pays their taxes on their business, who's in charge of that and who's going to be working with you on a contract basis with a defined scope of work on their own hours that they choose, and often bring their own tools and resources.

Speaker 1: 2:07

Now, opposed to that is a W2 employee. Some characteristics that define what a W2 employee is is individuals hired as part of the company's staff. So they're hired to be part of. They are not used as individual entities, but they are part of your company. Number two they work under the company's direction, following its policies, its procedures, its work hours, all of that. So when you have a W2 employee, you can require them to follow your procedures to, you can hold them to certain standards under your business and they are required to follow your direction. They are part of your company, they work with your company, they're under your direction, they're under your care, they're under your policies and procedures. And, thirdly, employees receive regular wages, benefits and their taxes are deducted by the employer. So the employer takes care of the taxes. So, kind of to wrap that up, a W2 employee is really part of your team. So, to wrap that up, an employee is really part of your team. You can direct them, you can supervise them, you can require things of them, you can hold them to a certain standard, you can evaluate them and they also, of course, get many perks receiving regular wages, benefits, not having to bring their own tools and resources, not needing to have their own LLC or pay taxes and to worry about that business side of things and those financial side of things on their own.

Speaker 1: 3:44

Okay, so now that you have those definitions of what those two things are, I want to dive deeper into looking at the specifics of what makes an employee and what makes a contractor and the different things you may see that employees can do or do and are required of. And then what contractors? Well, like what the two look like essentially okay. And the reason I want to dive deeper into that is because oftentimes you will see that these folks are misclassified and this is a big no-no. This can lead you into a lot of trouble, but there are reasons why business owners will misclassify and, instead of bringing someone on as a W-2 employee for the benefits to the owner, they will bring people on as a contractor illegally. So let's dive more into the two different categories and then we're going to talk about misclassification, and this time we're going to start with employees.

Speaker 1: 4:47

Okay, so employees are W-2 status. What does that mean? So W-2 is a document used in the United States to report an employee's annual wages and the amount of taxes withheld from their paycheck. Employers are required to provide their employees with the W-2 form by the end of January of every year, and the W-2 form includes information, information such as total earnings, social security, medicare taxes withheld, federal and state income taxes withheld and other relevant details. Now for contractors, the equivalent form is that 1099, like we mentioned, a contractor's 1099 employees, but it's the 1099 MICL Salaneous, and so I'm explaining that there's like these two different forms, right, 1099 versus W-2. Now the differences are going to be in what I explained to you, like why they use those forms. That they do because of how they perform as that type of employee and their relationship with that business. So typically, with employees, you're going to see engagement in long-term commitments, so they commit to becoming a team member and they onboard with a commitment of being their long-term. They're also eligible for employee benefits, so they are. By being a W-2 employee, you are able to receive paid time off, health insurance, retirement, a match to retirement, life insurance, dental insurance, supervision and support there, so continued education. You also get a lot of protection in ways that contractors do not get. So you get a lot of protection under laws and regulations, and so there are a lot of benefits to being a W-2 employee. So a lot of employee benefits.

Speaker 1: 6:46

Characteristic of an employee is you are subject to direct supervision. So this means that your work and your activities are closely monitored and guided by a supervisor, a manager or someone in a position of authority within the organization. No-transcript, the level of supervision vision can, of course, depend on the nature of work and employees experiences, but key aspects of being under direct supervision that you might see for an employee is closer monitoring, guidance and instructions, feedback and correction, training and development and also a limited, more limited autonomy than a contractor. So and what I mean by that is because you're under direct supervision, you typically can't just practice. However you want to practice, you may need approval for certain decisions or certain ways of practicing and certain considerations when taking certain actions.

Speaker 1: 7:47

Next, employees are part of the company culture. All the employees make up the company. They make up the company culture because you are integrated, you are part of the team. Employees are also managed through payroll systems, so they're set up through payroll and employees typically have a more structured working relationship with their employers, so they may have set hours, they may have certain requirements, they may work at the employer's location and, again, more structured, with receiving benefits as well. And lastly, before I wrap up, employees is that employees. You will also see that they have taxes withheld, which I mentioned a bit about, but they have taxes withheld from their paycheck by their employers that cover income tax, social security and Medicare and all of that. So hopefully that gave you a good picture and a good start to understanding what is an employee.

Speaker 1: 8:40

Now, moving on to a 1099 or a contractor Contractors are involved in short-term projects. Okay, so projects are more short-term, like hired on to specifically work on maybe a course. I don't have contractors, so that's not true. I do have a few, so to work on like Google ads or to work on your website, and so they work on these short projects that pop up every once in a while or a specific project in the business that are more short-term right. They're not hired on for long-term commitment.

Speaker 1: 9:20

1099 contractors also are required to have their own LLC and set up their own business and operate as their own business. They are expected to work independently, so they're not part of the practice. They are expected to work independently, which means no supervision. They have more autonomy. They can do what they want, how they wish, accept clients who they want, work with clients how they wish to work with clients. And, yeah, they're working independently. They're not subject to supervision. Now, of course, if you are not jiving with a contractor, if it doesn't line up with your practice, you can, of course, let them go, but you are not allowed to supervise or to check in on that and tell them what to do or tell them what you want to be different about their work and expect them to change that and require them to change that. They are independent. They get to decide. Of course you can give you back, but they get to decide and you cannot require that For 1099 employees.

Speaker 1: 10:30

The employer also lacks control over the time, the pay, the behaviors, because they're independent, so they don't have control over the behaviors. They don't have control over saying this is when I need you to work or when I need you to be available and this is what I will pay you. That is decided by the contractor. So, again, there's some control, but really, when we're talking about what should be a contractor, this is something that you should not have control over. This is not your, these are not your decisions. They're an independent business and they bring that to you and tell you when they wanna work and how they work.

Speaker 1: 11:10

Usually, a contractor it looks like this so they're provided with marketing, a website and client referrals by the employer. And this is if we're talking about group practice for therapy, dietetics and what have you. So we're talking about group practice right now as providers. So, if you have a contractor, it's simply that you have additional work, you have an office, you have a website, you have referrals coming your way and you need to outsource them and you hire on a contractor and you provide them with the marketing, with the website, possibly the office and those referrals, and that's that. That's what it is, and then you have some percentage of cuts, but that's where the relationship ends. That's where the line is. You cannot provide supervision, you cannot have certain requirements. That's where it ends. Additionally, another thing that tells you as a contractor is if you are hiring them to complete a specific project, like I mentioned a little bit, and they have more control over the project, how they accomplish it, what they are responsible for, how they work and when they work, and all of that. And lastly, contractors are considered self-employed, so they're responsible for paying their own taxes, including self-employment tax, and they also are responsible for their own benefits and getting benefits on their own.

Speaker 1: 12:34

Okay, wrapping it up there, I'm gonna give you an example of a contractor and a W-2 employee. That is part of my practice and they are classified correctly. So I have contractors and my contractors are people who help me with Google ads, with my website and with specific projects. So I'm going to think of one contractor and give you an example. So I have a contractor who works on my website. Now, when I need website help, I reach out to them. They are not part of the day-to-day tasks, I do not supervise them, but I reach out to them and I say, hey, I have some work needed and I reached out to them every once in a while and they help provide me with that service of website development and edits and they work on their own time and of course I give them feedback that they work on their own time according to how they wanna work and they put the project together and then we work back and forth and again I can give feedback and direct it a bit, but ultimately it's gonna be up to them whether or not they want to produce and make the website what I want.

Speaker 1: 13:46

To be right, they are in control. I pay them as a 10.99, meaning they are not on my payroll, they do not receive benefits. It's very, very separate and it feels very, very separate. And now an example of my W-2 employees. Those are my dieticians, those are my providers. They have flexible hours but I do require a certain client load and I can require a certain client load. I can also hold them to standards that I want to hold them to and help to train them, help them to develop, help to support them. There are requirements, there are oversight and they get all the benefits of being an employee. They also get the protection of being a W-2 employee and I can get pretty passionate about this subject, because if you are utilizing and if you're misclassifying your W-2s as contractors, which we will get into. That is not fair to your W-2 employees. They miss out on a lot of perks and you are using them in a way that is just harmful and not correct.

Speaker 1: 14:52

So I'm going to try and stay for listeners kind of neutral and unbiased on this. I did just state that it is an important thing to me and I think it is necessary to classify them, not only legally to make sure you're doing the quote unquote right thing, but there's reasons for this. There's reason for protection of those employees and for them to, you know, get what they deserve. You want to be acting in accordance to that and that's really important. But I'm going to try and stay neutral and like non-emotional in this conversation, because you also may be someone who just is listening and if you are misclassifying, you may not know you may be doing this really unconsciously. You may not have awareness, you may be new, you may not have looked into it, you may be following other people's footsteps and you don't know that it's not that you're maybe doing something wrong. So this is a time to get educated, to raise some awareness for yourself and to think for yourself. If you do already have employees or contractors, just double check to make sure you're doing it correctly, and also for those who do not have contractors or employees yet but are considering bringing on a contractor employee. This can help you to draw that line between what is misclassification, what's an employee and what's a contractor. So, as mentioned, in a neutral way, treating contractors these are just facts.

Speaker 1: 16:27

Treating contractors like employees is illegal and it's known as misclassification, and it can result in serious legal and financial consequences for business owners. So, as business owners, to protect yourself and to protect those folks on your team or contributing to your business, this is really really important. Now, while the specifics can vary depending on your local labor laws and regulations, some common illegal practices are the following Number one excessive control. If a business owner exerts too much control over a contractor's work, treating them as if they were an employee, with detailed instructions, schedule requirements, workplace restrictions it's going to be considered a misclassification.

Speaker 1: 17:14

Number two exclusive work range. If you're requiring contractors to work exclusively for the business and not along them to take on extra clients or projects, this is indicative of an employment relationship. It's an employment relationship to require that folks work exclusively for your business and not for others. You cannot do that if you have a contractor. You cannot do that to the contractor. Number three set hours and location. Mandating specific working hours and locations for your contractors as opposed to allowing them to have like the flexibility and that autonomy that's definitely a sign of misclassification.

Speaker 1: 18:00

Number four equipment and tools. So providing contractors with company equipment, tools and supplies that are typically used by employees are going to blur the lines between what is a contractor and what's an employee and that status. Number five training and orientation. Subjecting contractors to the same training, onboarding or orientation programs as employees, especially when the training is unrelated to the contracted work, are going to raise concerns. Number six direct supervision. So if a contractor is being directly supervised by the business owner or by an employee rather than having autonomy over their work, this is an employer-employee relationship.

Speaker 1: 18:45

Number seven integration with the workforce. Contractors who are integrated into the company's workforce, that means they participate in team meetings, they use company email addresses, they're attending company events, they're going that's misclassification. That's not a contractor. That is indicative of an employee. Number eight performance reviews. Subjecting contractors to formal performance reviews, evaluations or disciplinary actions can suggest an employment relationship. I forgot what number I'm on, so I'm just going to say next one. So the next one long-term arrangement Maintaining a long-term working relationship with a contractor where the work is ongoing it's indefinite rather than a specific project or period. That's problematic. Next, payment structure. So paying contractors on a regular payroll schedule as if they were employees, rather than on a per project or hourly basis, that's going to raise concerns. And lastly, a non-compete agreement. So requiring contractors to sign non-compete agreements that limit their ability to work for other clients or compete with the business can indicate employer-employee relationship.

Speaker 1: 19:57

So for you, considering what are your current staff or also what type of hire you are going to make, now that you know what are the different classifications, you are going to be better able to understand. Well, what is it exactly that I need? Do I need a contractor or do I need an employee? Let's say you're just starting out and you are a private practice owner and you are just needing some additional help sometimes and you're considering hiring an assistant. Now, if you're hiring an assistant and you just want a few hours from them and your intentions are to allow them to work whenever they want, can you wants someone who is trained up and they can train themselves, and they have. They maybe already have other clients that they do assistant work for and you're going to pay them a certain amount of hours per week and it might vary and you might increase them, and then it's just kind of separate. But you're not going to be evaluating them, you're not going to have performance reviews, you're not gonna be holding them to certain hours. Well then, your assistant can very well be a contractor. Right, they can be a 1099. Now if you want to hire a full-time assistant on and you want them to exclusively work with you for 40 hours or so a week and you want to be able to train them and review them, then this is going to be an employee. So I'm sure that gives you a clear picture.

Speaker 1: 21:33

But let's do some self-reflection questions as we come to an end here. So, number one ask yourself do I want hands-on control over the work or am I comfortable with true delegation and outsourcing outsourcing outside of your business? Number two is the work specialized and temporary or is it ongoing as an ongoing core function of the business? Number three can I handle and am I up for handling administrative tasks like payroll, taxes and benefits? Am I up for training and supervision? Am I there for the things that W-2 bring and the care I need to give to my W-2 employees? Number four how does the budget align with the financial implications of each classification? Now, typically I could say almost always a W-2 employee is going to be more expensive for the business than a contractor, and this is a lot of the reason why. And it also requires less work of the employer, so there's less responsibility on the employer. So that's why I see a lot of people bringing on contractors, and oftentimes in a misclassification way, because it's going to be easier and less expensive.

Speaker 1: 22:51

And so when you're considering a W-2 or a contractor and what the needs of your business are, you want to look at your budget. You want to look at your future plans and what aligns and what you can do and what the financial implications implications can be. Next question do I need someone to grow with the business or complete a specific project? Next, how much time am I willing to invest in training and integration? And last question how will this decision impact the overall structure and dynamics of the team and of my company? So, hopefully those were helpful. Hopefully you have a little bit more direction in moving forward and remember that this choice between hiring a contractor and a W-2 employee can significantly influence your business, its resources, its growth trajectory as well.

Speaker 1: 23:36

Careful considerations and a clear understanding of the distinctions which, hopefully, this gave you the distinctions between the two classifications are going to help you to make the right choices for your unique situation in your business. Misclassifying workers as contractors when they should be classified as employees can result in penalties, fines, back taxes and legal action. So be very careful, be very mindful. You want to be aware and you want to be educated, which is it's good you're here listening if this is new for you. If there's any uncertainty about a workers classification, you can absolutely always seek support from someone who is doing this, who knows better. Also, legally, you definitely want to seek legal advice or consulting with labor authorities that can provide clarity, prevent any legal issues down the road and just make sure you are practicing appropriately.

Speaker 1: 24:31

So, wrapping that up, I hope you are leaving more empowered, more aware to make your decision to grow your team. It's a wonderful thing, it is an exciting thing and if you are thinking of growing your team, kudos to you. That's super exciting, a new step to your business. I am all about delegation listen to the episode on that and there's lots of exciting and adventures to come and lots of barriers and hard stuff too, but you are doing a great thing by educating yourself by listening to this podcast and I highly recommend, of course, as always, seeking out a business coach.

Speaker 1: 25:07

I am available. Well, depending on when you hear this episode, you can always ask me about availability. I love coaching group practice owners who are working to strengthen their group practice, grow their current group practice, or a private practice owner looking to get into who's solo, who's looking to get into group practice. So you can, of course, email me at biz, at jamie rdcom. But either way, I am so glad you're here. I hope you leave with new knowledge and, again, insight and empowerment for your next steps as a business owner. Until next time, have a wonderful day and we will chat soon.