Running an e-commerce business is a thrilling adventure, but it can also be a whirlwind of endless decisions.
One of the most important choices you’ll make comes during the hiring process: 1099 contractors vs. employees.
On the one hand, contractors offer flexibility, expertise, and freedom from the hassles of payroll and benefits. On the other hand, employees provide stability, loyalty, and a deeper understanding of your business goals.
So, which way do you go?
Let’s dive deeper into your options.
The Contractor Conundrum
Let’s talk about 1099 contractors first.
1099 Contractors are independent workers who provide their services to businesses on a freelance basis.
They are not employees of the business, so they are not entitled to employee benefits such as health insurance, paid time off, and retirement contributions.
There are a number of reasons why businesses choose to hire contractors instead of employees.
One reason is that contractors can be a more cost-effective option, as businesses do not have to pay payroll taxes or benefits for contractors.
Another reason is that contractors can offer flexibility and expertise that businesses may not have in-house.
For example, an e-commerce business might hire a contractor to help with a specific project, such as designing a new website or developing a marketing campaign. The business may also hire a contractor to provide ongoing services, such as customer support or social media management.
Here are some of the pros and cons of hiring 1099 contractors:
- Cost savings: Businesses can save money on payroll taxes and benefits by hiring contractors.
- Flexibility: Contractors can offer flexibility in terms of their work hours, location, and availability.
- Expertise: Contractors can provide businesses with access to specialized skills and expertise that they may not have in-house.
- Temporary talent: Contractors are often hired for specific projects or short-term commitments. This means that businesses may need to constantly cycle through new contractors, which can disrupt workflow and hinder long-term growth.
- Expertise limits: Contractors may not have the same in-depth knowledge of a business’s products and services as employees. This can lead to delays, miscommunications, and inconsistencies in branding and marketing efforts.
- Compliance risks: Businesses need to be careful to ensure that they are correctly classifying their workers as contractors or employees. The IRS has strict rules about this, and businesses can face penalties for misclassifying workers.
Overall, 1099 contractors can be a valuable asset to e-commerce businesses.
However, it is important to weigh the pros and cons carefully before making the decision to hire a contractor.
In some instances, hiring an employee may be the better way to go. Which leads us to…
The Employee Equation
Let’s chat employees.
Employees are the backbone of any successful business. They are the individuals who dedicate their time and energy to helping you achieve your business goals.
Employees can offer stability, loyalty, and a deeper understanding of your business than contractors can.
However, employees also come with their own set of considerations. One of the biggest considerations is the cost of hiring and retaining employees.
Businesses need to pay employees a salary or hourly wage, as well as payroll taxes, benefits, and potential raises. This can be a significant financial investment, especially for small businesses.
Another consideration is the long-term commitment involved in hiring employees. When you hire an employee, you are making a commitment to provide them with a job for a certain period of time. This can be daunting if your business is still in its early stages or experiencing fluctuations in workload.
Here are some of the pros and cons of hiring employees:
- Stability: Employees can provide stability and continuity for your business.
- Loyalty: Employees are more likely to be loyal to your business than contractors.
- Deeper understanding: Employees can develop a deeper understanding of your business and products than contractors can.
- Cost: Hiring and retaining employees can be expensive.
- Long-term commitment: Hiring employees is a long-term commitment.
- Complexity: Managing employees can be complex, especially for small businesses.
Overall, the decision of whether to hire contractors or employees depends on a number of factors, including the specific needs of your business, your budget, and your long-term goals.
IRS Expectations for Determining Employee vs. Contractor and the Penalties for Getting It Wrong
Now, remember when we said that you need to be careful when hiring independent contractors?
That’s because the IRS has strict rules about how workers must be classified, and businesses can face significant penalties for misclassifying workers.
If a business misclassifies a worker as a contractor, the business may be liable for back taxes and penalties for both the employer and employee portions of Social Security and Medicare taxes, as well as unemployment insurance taxes. The IRS may also require the business to pay the worker’s benefits, such as paid time off and health insurance.
To avoid misclassification, you should carefully consider the IRS’s 20-factor test, which considers a variety of factors, including:
- The employer’s control over the worker’s work, such as the ability to set hours, supervise work, and provide equipment and supplies.
- The financial relationship between the worker and the business, such as whether the worker is paid on an hourly or project basis, and whether the worker receives benefits from the business.
- The type of work being performed, such as whether the work is an essential part of the business or is temporary or specialized.
If you’re unsure whether a worker should be classified as an employee or a contractor, it is best to consult with an e-commerce accountant or tax advisor.
Here are some tips you can use to avoid misclassifying workers:
- Use the IRS’s 20-factor test: When determining whether a worker should be classified as an employee or a contractor, carefully consider the IRS’s 20-factor test.
- Document the relationship: Keep a written record of the relationship between the worker and the business, including the worker’s job duties, compensation, and benefits.
- Use a contract: When hiring contractors, use a written contract that clearly outlines the scope of work, payment terms, and termination provisions.
- Be consistent: Treat all workers consistently, regardless of their status as an employee or contractor.
So, Which Way Do You Go?
While there are no clear-cut rules about which roles should be hired as 1099 contractors and vice versa, here are a few general recommendations to follow:
When to hire a contractor in e-commerce:
- Short-term projects: Contractors are a good option for short-term projects, such as developing a new website or designing a marketing campaign.
- Specialized skills: Contractors can provide specialized skills that you may not have in-house, such as expertise in SEO, PPC, or social media marketing.
- Flexibility: Contractors can offer flexibility in terms of their work hours, location, and availability. This can be helpful if you need someone to work on a specific project or task on a part-time or temporary basis.
When to hire an employee in e-commerce:
- Ongoing tasks: If you need someone to handle ongoing tasks, such as customer service, order fulfillment, or content creation, it is generally better to hire an employee.
- Core business functions: Employees are a good option for core business functions, such as product development, sales, and marketing.
- Long-term growth: If you are planning to grow your business significantly in the future, it is important to have a team of employees who are dedicated to your business and your goals.
Whichever way you choose, here are a few tips to make the process more successful:
- Clearly define the scope of work. This will help to avoid misunderstandings and ensure that the contractor or employee meets your expectations.
- Get a written contract in place. This will protect both you and the contractor or employee.
- Classify your workers correctly. This is important for tax and legal reasons.
- Hire for the right fit. Look for people who are a good match for your company’s culture and values.
- Provide training and development. Help your contractors and employees to grow and learn.
- Create a positive work environment. This will help to boost morale and productivity.
By following these tips, you can build a strong team of contractors and employees who will help you achieve your business goals.
Need More Help With Your E-commerce Hiring?
There’s no one-size-fits-all answer to the contractor vs. employee dilemma. The best choice for your business will depend on your specific circumstances and goals.
But don’t worry, you’re not alone in this decision-making process. Many accounting firms specialize in helping e-commerce businesses navigate the complexities of hiring and managing employees. Including ours!
If you need more help with making these financial decisions in your business, it’s what we’re here for. Simply get started by filling in the form on our website here.
Remember, your choice of contractors or employees can make a significant impact on the success of your e-commerce business.
Take the time to carefully consider your options and make a decision that aligns with your business’s needs and long-term goals.
Until next time!