Preface: Although there is not an exact formula to guide a business owner or manager through the process, asking the right strategic questions before every hire is always advised.
Help Wanted (Segment III)
Credit: Jacob M. Dietz, CPA
Advantages of Employees
One advantage of having employees, if the laws and taxes are complied with, is the safety and peace of mind of doing things right. You do not need to worry that the authorities will justly punish you for evil doing.
Another benefit can be a tax deduction. Under the federal tax system, there is a 20% Qualified Business Income Deduction that sometimes needs wages for it to take effect. The deduction is complex, and all the complexities of it are beyond the scope of this article.
Another advantage of an employee is that you may have greater control over when they do the work, and how they do the work. For example, if due to a scheduling conflict you need to move a job up two weeks, you may be able to rearrange the schedule of your employees so that they can do the work. If you are depending on a subcontractor, it may be harder to get them to rearrange their schedule.
Also, if you are finicky about what materials to use and how to do it, it may be easier to oversee an employee. While you could stipulate in a contract how a subcontractor works, you may find it easier to train employees more specifically than subcontractors.
Disadvantages of Employees
One major disadvantage of adding employees is the payroll taxes and insurance and filings that can come with payroll. One way of handling these administrative burdens is to hire a bookkeeping employee to do that. Another way is to outsource the payroll to a firm that handles much of the compliance and filings for you. Both options cost money.
Another disadvantage is that if you do payroll taxes wrong, there could be penalties. Outsourcing your payroll to experts can help minimize these risks.
There is also the potential to violate labor laws. That is beyond the scope of this blog and you can consult with an attorney for more information.
Checklist Before Hiring New Employees
Before hiring employees, consider going through a checklist.
- From where will the money come to pay the employee (new sales, cost savings, etc.)?
- Will there be additional overhead that comes with the employee (tools, taxes etc.)?
- Will there be additional administrative work and compliance issues?
- How will the new employee affect the bottom line?
- How many hours of work do you have available, and for how many hours does the potential employee want to work?
- Are there any legal issues or risks? Consider consulting with an attorney if there are risks.
Hiring employees comes with both advantages and disadvantages. Although there is not an exact formula to guide a business owner or manager through the process, asking questions before hiring can be wise. If the business knows how it will pay for the employee, it can make it easier than if the business hires an employee and cannot make payroll. Count the costs before putting out the “Help Wanted” sign.
This article is general in nature, and it does not contain legal advice. Please contact your accountant to see what applies in your specific situation.