So you want to hire some people to work for you and help grow your business or take some of the workload off? Good, but you should be aware of what goes with that. The following information is relevant in the USA, although other countries probably follow similar rules and regulations.
Most of you here will be considering bringing people on as "independent contractors", where they do work for you and you write them a check for the work they did.
This sounds all fine and dandy but the IRS and your State does not really like this kind of relationship. This kind of business relationship is highly targeted by the IRS and your State because it's heavily abused by employers. And that means if you start 1099'ing people, you're at risk.
An independent contractor is someone who works independently of you in their own business. You basically can only require them to complete something. If you are telling them when to be somewhere, or how to do something, there's a good chance you are actually employing them and not subcontracting them.
If the independent contractor does not run their own business, market their own business publicly, or work with other clients besides you, chances are you are actually employing them.
Elance and Odesk type services are OK to use simply because the relationship is VERY clear that they are independent and that they work for others under contract.
Risks: Here are some scenarios:
A. Your worker goes to file their taxes at the end of the year and their preparer tells them they will need to pay self employment tax, a ton of income taxes, and penalties for not filing quarterly taxes. Your worker freaks out because they didn't understand any of this and they complain to the IRS.
B. Your worker files for unemployment after you can't pay them anymore and the state now does an Audit, where they determine you were actually employing them, and now have to pay unemployment insurance (and penalties) on them. I have been through this by the way.
C. You get audited by the IRS and they find you were actually employing them and now owe a ton of money to them for misclassifying them.
D. One of your independent contractors gets injured while 'working' for you. The state looks at their job and determines they were actually employees, which means you also did not cover them under a workers comp insurance policy, so you're basically f****d all around.
The safest way to hire people are as real employees. Prepare to hate the government even more though. The good thing is that you will be able to control everything and generally they will work cheaper since they are getting stability (hopefully!).
Employing someone entails these general requirements:
1. You need to be compliant with your state (and fed) employment laws. This is no joke and you'll see why businesses need HR departments. It's a lot of paperwork and can be very confusing. You'll need to keep good records and keep them private. This kind of stuff will suck up lots of your time unless you hire someone to do it for you.
2. You'll need an employee handbook and internal policies in place. This might seem silly but it's important because it shows what your employees are held accountable for. This will help you if legal issues arise if an employee takes legal action against you in the future.
3. You need to process their payroll properly. This means filing W4's and taking the proper payroll taxes out. You'll need to take their taxes out of their pay, send them to the appropriate government offices, and you'll need to pay half of some of them yourself. These taxes include Fed tax, State tax, state unemployment insurance, Fed unemployment, Medicare, and Social Security.
For my employees (in NY state) I pay 12% for these payroll taxes. So a $10/hour employee is really costing me $11.20.
You will also need to purchase a workers comp policy (I believe almost all states require it and you'd be stupid not to have it anyways) which could cost anything from a few hundred to many thousand just to get started. Workers compensation insurance covers your employees if they get injured on the job, and it covers your ass so they can't sue you. Salespeople and Clerical jobs will probably something like 1% or less.
You'll need an accountant to take care of all this for you, as payroll is NOT something you should even consider handling on your own. Or you use a payroll service like paychex or ADP. Paychex will charge you about $75 per week to process your payroll and mail your employees checks, and they will take care of all the payroll stuff for you. You'll still have to stay compliant with HR stuff, but they make the payroll a lot easier and they automatically mail your employer tax obligations out for you.
Last thing, you'll also need to handle garnishments like judgements and child support orders where you have to deduct things out of their checks automatically and send them to the right recipients.
Risks: Here are some scenarios:
A. You fire someone and they file for unemployment and win. Your unemployment rates go up 4% or so.
B. Your payroll is processed days before it's delivered, which if you're not careful, can run into cash flow problems that cause you to not meet payroll. You don't want your employees cashing their checks and having them bounce.
C. You can be audited by your state and they will fine you for stupid things like not having eight zillion posters on your wall showing minimum wage rates and such. You can also be fined for a million things that deal with HR stuff that you don't even have a clue about.
D. If you're records aren't good and you aren't totally compliant, your employees can really screw you over if things go bad. If they say they were supposed to be paid X amount or that you didn't pay them for something, you better have the right documentation and compliance together.
Don't even think of this. Hiring people 'under the table' is rampant and you can probably see why it's so appealing to do, but it's not worth it. Eventually you will get caught and fined when someone blows the whistle on you. Or your worker gets injured and sues you for a zillion dollars.
Also... the cash you're paying the worker is actually looking like income to you so you'll have to pay tax on it, while they get it tax free.
I certainly don't want to scare anyone off of hiring people or finding people to help them grow, but the last thing you want to do is get audited and have to pay out the nose down the road.
Fellow Warrior Dan McCoy just posted this link in another tread for a payroll processing solution: https://zenpayroll.com/