Employee or Contractor?

The first question to ponder when considering a hire is whether the new person should be an employee or a contractor. Both the IRS and the SBA websites can help define the difference between the two. There are consequences for misidentifying your personnel  In brief:


An Employee:

Fills a role which is a permanent part of the business.

Performs tasks which are essential to the business.

Is controlled and trained by the business or its employees.

A Contractor:

Operates as a separate business, may have his or her own employees, bank accounts, business name and records.

Invoices for work completed.

Has other clients.

Provides his or her own tools and materials.

There are differing tax implications and control issues involved, but the choice between hiring a contractor or an employee still confounds many owners.  The duration of the relationship may be a test, but you could have a 30 year relationship with an accountant who has no other clients and reasonably call him/her a contractor.

Owners often prefer to engage a contractor because, although the compensation may be higher, the business pays no benefits. The relationship may be ended at will if no contract is in place, and the service is on an as-needed basis. These characteristics of a contractor are very appealing when money is tight and I have seen situations where the contractor is indistinguishable from an employee and is engaged for years. Before you make the decision, be sure you and the individual involved understand the legal ramifications of your choice.

Hiring Your First Employee

Hire Me

When business is good and it has become a struggle for you to keep up the obvious choice is to hire someone to relieve you. Be sure you follow some critical steps:

  1. If you haven’t already, contact the IRS and obtain an Employer Identification Number (EIN)
  1. Set up your employee records as required by the IRS and acquire all the necessary forms. You will be withholding taxes from employee paychecks and depositing it with the government at specific deadlines. If you fail to deposit taxes in a timely manner the resulting encounter(s) with the IRS may cause you enormous grief.
  2. Check with your state taxing agency to determine what they require.
  1. You will be need to verify the potential employee’s eligibility to work in the US which requires that you examine documents to confirm that the person is permitted to work in the US. Within three days of hire you must file form I-9 from the US Citizenship and Immigration Services (USCIS).
  1. You are required to carry Workers’ Compensation Insurance available through your state’s program or a commercial carrier. (See ‘Do You Really Need Small Business Insurance?’)
  1. You must comply with equal opportunity and fair labor standards, laws on minimum wages, child labor, and overtime, to name just a few. See Equal Opportunity Commission’s website in addition to your state’s website.
  1. All hires must be reported to your State’s New Hire Reporting Program.
  1. Your must hang a variety of posters in your place of business. See Workplace Posters for the required Federal and State decorations.

The next suggestion is too often bypassed and shouldn’t be: Write a Job Description.  If you are thinking that you only want them to do A and B (e.g. unload trucks and put stock on shelves) and that doesn’t require a description, I submit you are wrong because that is not all you expect them to do.  You want them to do paperwork, deal with the drivers, keep the warehouse clean, maintain – and possibly devise – methods of maintaining, conserving and protecting your inventory, and generally grow that part of the business along with the rest.

The job description will serve an important function as a basis for performance reviews and evaluations. It is also the essential tool in creating a posting for job.


Basics to include in your job description:

            Job title.

Broad description of the function of the job.

Description of duties to be performed.

Key functions of the job.

List of required qualifications, skills or background.

Description of the reporting relationships.

Write clear statement, avoiding jargon where possible.  Including a statement of possible career advancement makes the job more enticing.  You might want to add any training or other perks the employee will receive.  Including salary range has pluses and minuses but may save you from having to turn away people who are radically overqualified.

The Interview

Ask your self what is most important for this hire.  Is it experience? Intelligence and willingness to learn? Does the person need to fit Hireseamlessly with your current employees? Does he or she need to present an image to the public?  What are the key ingredients?

Who else should interview this person? (If it’s your first hire there may not be anyone in house, but consider having your accountant interview a prospective bookkeeper, for instance.) More eyes on the person is more potentially valuable input since each will likely see the candidate somewhat differently.

Listen, both to what the potential hire says and how they say it.  People are nervous but will signal some important information in how they deliver answers and what questions they ask. Some suggest using “out of the box questions” (“ If you were a pizza, what kind would you be?”) That’s fine if you know how to interpret the answer.

Once you’ve made a decision, be kind and email the losing candidates the usual form letter letting them know they have not been chosen.



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