Employees vs independent contractors: who to hire in your service business

The question of whether to have employees or independent contractors comes up quite frequently amongst service business owners, especially those newly in business or planning to open a business in the near future. Depending on the type of business you run, and circumstances particular to how you and your staff service clients, you’ll either be in one camp or the other. Or you may find you have some of both. In any case, it’s important to properly classify your staff, as it can be quite costly if you are found to have classified them incorrectly.

An attorney friend of mine relayed a situation where a cleaning service in Chico, CA had hired several “contractors” to clean houses. The business owner had a great little business until she was audited by the IRS and found to have been misclassifying her employees. She had been providing the cleaning supplies to the contractors, the key factor the IRS used to declare that her contractors were actually employees. (An independent contractor must provide his own tools and supplies). She was forced to pay payroll taxes on all historical pay she had paid to her “contractors,” a crippling amount of money. She ultimately had to close her business.

The IRS website lists the factors that go into determining proper classification of employee or independent contractor. The water can be a bit muddy here, but the key considerations are how much control the employer has over the staff member, or alternatively, how much independence the staff member has. We can boil it down to your ability as an employer to require your staff to service clients in a particular way, work certain hours, or use specified products, tools or equipment.

For many service businesses the client experience is the key factor that contributes to their success. A consistently great client experience increases word of mouth referrals, increases retention, and positively affects the bottom line of the business. If you have processes in place that all service providers follow (in order to ensure a consistently great client experience) you will want to classify your staff as employees, as you legally cannot tell a contractor how to do her job.

There are circumstances where a staff member is legitimately an independent contractor. For example, a yoga teacher that teaches 2 classes at your CrossFit gym each week, and also teaches classes at several other studios in town. The service she is providing (yoga) is different than your regular program offerings, and she is providing the same service for other businesses.

I created this short Prezi to help you determine if your staff are employees or contractors. Check it out!