With the Patient Protection and Affordable Care Act (PPCA) becoming fully effective in 2015, it will become more important than ever to get the independent vs. employee classification correct. In 2015, any company with 50 or more employees will be required to offer healthcare insurance benefits to its employees working at least 30 hours per week. Independent contractors are not considered employees and thus employers would not be required to provide insurance benefits for independent contractors and would be able to save money not only from employment related taxes but also from insurance costs.
Given that the misclassification of independent contractors is an ongoing IRS issue combined with the upcoming implementation of PPCA, the IRS will be even more diligent in making sure businesses are following the rules. The IRS provides the following guidance on classification:
1. Behavioral – If the company has the right to control and how and what the worker does then he or she is not an independent contractor
2. Financial – If the company controls how the worker is paid as well what is reimbursed and what tools are used then the worker is not an independent contractor.
3. Relationship Type – If the worker receives employee-like benefits such as vacation pay and/or the relationship is such that it is critical to the ongoing operations of the business over the long-term then the employee is likely not an independent contractor.
It does not matter if you have a written contract in place. The treatment of the worker will overrule any written contract if the nature of the work falls into one of the three categories listed above. In addition, it does matter if the worker is full-time or part-time for classification purposes. For more insight on worker classification, visit IRS.gov or discuss with your tax specialist.
One of my clients who owns and runs a Chicago day spa was paying his employees every week. When the business had a slow week, he was struggling to make payroll. Does this sound like your situation? Employee costs are usually the largest expense for companies, no matter what their size. Here are four tips to better cash management.
Establish a business line of credit before you need it. A line of credit will enable your business to weather short-term cash crunches due to temporary cash flow problems such as weekly fluctuations in business sales.
Pay employees bi-weekly. Pay independent contractors only after you have received payment. By managing payroll this way you can reduce administrative costs and balance cash receipts with cash payments.
Transition from paper checks to direct deposit. This not only clears up administrative tasks such as cutting and distributing checks but also cuts costs.
Hire the right people the first time. If you are constantly refilling positions because you had to fire the person for non-performance or they quit something is wrong with your hiring process. The cost of training and rehiring can add up both in dollars and time. If you do it right the first time you will not only save money but also frustration.
Hire the right people who can fill multiple roles. This works great for businesses that suffer from drastic changes in demand. For example, a day spa may be fully booked on the weekends but suffer from low demand on weekdays. To combat this, I would recommend you hire an employee who could fulfill multiple roles such as massage therapist and esthetician. Instead of having two idle employees you now have one that can service clients in multiple services if demand picks up.
By following these tips you can lower the administrative burden of payroll and save cash. Visit our website to learn more about Loftis Consulting and its part-time CFO services.