Seven Reasons You Want to Use Independent Contractors To Grow Your Business
There are dozens, maybe hundreds, of strategies that we've used successfully over the years to save our clients taxes. One such strategy is to use Independent Contractors to build your business. I'm going to cut right to chase here and just jump into this.
Reason #1: It's easier to ramp up your business
You can contract with Independent Contractors (ICs) for short term, month-to-month work or just by project. You don't have to worry about training them or providing tools for them to work with.
There is an assumption that they can hit the ground running. If they can't, the worst case is you've tried it out for only 30 days. You didn't have to invest time in training them and providing salary & benefits during this time. They either can perform, or not. If they don't, they're gone.
Reason #2: It's easier to change the business model if you need to change quickly
If your real estate investing business goes down, it's a lot easier to stop using an IC than it is letting an employee go. Besides the emotional issues of letting go an employee who depends on you completely for their income, there are also legal and benefit issues. You might be forced to cover the employees under the new COBRA laws. Your unemployment rates will go up.
Reason #3: Quality Improves with an Independent Contractor
There is a different mindset with an IC. She has her own business too. That means her reputation is on the line when she works with your company.
I want to be clear here. Not all employees have the “what's in it for me” attitude. There are clearly dedicated people in the workforce who work as employees. If you're one of them, I hope someday soon you get the chance to use that dedication, hard work ethic and brain power in building your own business instead of someone else's.
In a second I'll come back and finish up with the seven reasons to build your business with Independent Contractors (IC), but first I've got to give you a warning.
There are some things you absolutely must have to support a owner/independent contractor relationship instead of an employer/employee relationship. If you don't get this part right, here is what could happen:
The IRS will probably send a letter to your Independent Contractor (if they file as a Sole Proprietorship or receive a Form 1099) and ask them if they're sure they aren't really an employee. If your IC says he really should be an employee, then that means:
- You have to pay the past payroll taxes for him INCLUDING penalties,
- You have to cover him for all benefits that you have taken, and
- You have to pay overtime.
Plus you'll get an audit of all of your other ICs.
The place you're most likely to run into trouble is if you've terminated a relationship and the other guy isn't happy about it. Or you've got an IC who didn't understand the benefits and never followed the steps he needed to. So, come tax time, he's looking at more taxes than he had anticipated. That's when Uncle Sam shows up and says your IC doesn't need to them. YOU can pay them, plus your IC might even get some more money and benefits.
That's what can happen if you don't do this right.
The good news is that it's possible to set up an IC arrangement that works, as long as you follow the rules.
Reason #4: Independent Contractors are Value Focused, Employees are Time Focused
Sadly, you can't pay employees the way you can pay an IC in most cases. I think philosophically that's one of the biggest problems most businesses fact. Governmental rules and regulations generally say you have to pay employees based on the time they work. In other words, they get paid by the hour, week or month.
But, if you switch to ICs, you can pay based on a result. For example, when a project completes, or at various milestones, the IC will be paid. In my tax consulting business, I have ICs who are paid for preparing tax returns. If they don't get the tax return done, they don't get paid.
Reason #5: Less support costs
Do you remember back in Reasons #1 & #2, when I talked about how ICs allow you to more easily grow or shrink your business?
One of the biggest savings is in the unseen costs. That's all the support costs that go into having an employee that you don't need with an IC.
Reason #6: Better Benefits for Owners
As your business grows and becomes more prosperous, chances are you're going to be even more focused on looking for benefits that you can take from the company tax-free.
Independent Contractors do not need to be covered under your benefit plans. That means you can add medical insurance, pension plans, education assistance plans, child care plans and more without needing to cover everybody who might perform work with your company.
Reason #7. Less tax!
This is the big one for me. You'll pay less income tax and you'll pay WAY less in payroll taxes with Independent Contractors.
I've gone through those reasons pretty quickly, but hopefully you can see how having Independent Contractors can grow your business with ultimate flexibility and save taxes at the same time.