So You Think You Want a Partner

Partner or Hire

The Good, Not So Good, The Bad and The Ugly

Most people when starting a business at some point want or need to grow and expand the business.  The easiest way might be to join up with another business person as a partner.  The other way to grow and build you business is to hire employees or contract labor.

No Partner: Doing It on Your Own

In order to build and grow your business you may need to hire employees and/or subcontractors (more on this later).

When hiring employees you need to take into consideration certain employment issues and costs.  As an employer you are required not only to withhold FICA and Medicare taxes, but are also required to match that amount and a business expense.  In addition to this expense, you will also be required to make contributions into both the Federal Unemployment and your state Unemployment funds.

These contributions are not on the entire payroll but only a portion of them.  The amount subject to contribution will vary from State to State.  In most states the initial rate is 2.7% of the first $8,500 (more or less) of taxable wages.  The Federal Contribution limit is on the first $7,000 of wages at 0.8%.  (These will need to be verified before publishing).

Not only are there the above payroll taxes, but as you hire more and more employees, you may be required to provide them with certain benefits.  The biggest concern would the providing of Health Insurance.  Another benefit that will need to be considered is that of retirement/profit sharing/401(k).  For either of these, you should contact a professional that will walk you thru all the issues, requirements and mandatory eligibility for the employees.

Your other option is to hire subcontractors. With “subs” you will not be required to either withhold payroll taxes nor to match them along with unemployment taxes.  While this might be the cheaper route, it is loaded with potential problems.  The biggest potential problem is with the IRS.  The IRS frowns on the use of contractors, especially when they can be classified as employees.

The IRS publishes a list of 20 questions that should be considered in the classification of employees vs. contractors.  When considering this option, it would be best to get the advice of your CPA or advisor.  Another benefit of using “subs” is that as the business grows you will not be required to offer them benefits such as Health Insurance and/or Retirement benefits, as would be required with an employee.

Next - IRS 20 Questions relating to contract labor

Phil owns Juravel & Company, LLC, a full service CPA firm. He is an expert in accounting for small and medium sized businesses with clients ranging from “Mom and Pop” shops to one of the largest helicopter operators in the Southeast. (And, yes, Phil was at Woodstock in 1969!)


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