ASK Priority: GREAT QUESTIONS ANSWEREDPosted on Sunday, September 11th, 2005 by Self Employed Web Team
GREAT QUESTIONS ANSWERED
Q. After a couple of years running my home-based business, I can no longer handle the workload myself. I’ve opened my own office and now I need to hire an employee to cover clerical tasks and do some light bookkeeping. How do I determine what would be a reasonable salary for the new employee?
—KF, Philipsburg, MT
Setting a new employee’s salary can be a challenging task for first time employers, or even established employers who are recruiting for a newly created position. Too low a salary will fail to attract qualified candidates, while too high a salary will put a strain on the business’s budget and may disgruntle other employees.
One useful method of figuring out the right salary is to network with managers or owners of similar businesses in your area and learn what salaries they set for positions like the one you need to fill. Consulting a local accountant can sometimes be helpful since he or she probably has a grasp on the typical salary range for most jobs in your community. Regional trade associations usually publish surveys of salaries for various positions within their fields, though salary levels can sometimes vary significantly between even neighboring communities. The federal U.S. Bureau of Labor Statistics (bls.gov) publishes a nationwide survey broken down by region and occupation, but the data is often dated. Additionally, consulting the employment listings in your local newspaper or employment office is a good idea since many such listings will offer a suggested salary, providing a yardstick with which to assess your contemplated offer.
You should set a salary range with a defined floor and ceiling, rather than simply a specific number. This gives you room to negotiate with prospective employees, permitting you to adjust your final salary offer based on the particular applicant’s experience and skills.
Be sure to emphasize any benefits that may accompany a position in addition to the base salary. Perks like flexible work hours, health insurance, bonuses, childcare, compensation for transportation costs, and retirement plans, if available, should be mentioned in tandem with any proposed salary. Finally, it’s a good idea to spell out all the details in an offer letter, which should state the employee’s start date, salary, benefits, bonuses, and vacation time. Putting these elements into writing can prevent future misunderstandings and disputes between you and your new employee.
Q. My company produces small commemorative plaques and sports trophies. I have used an outside person for several years to perform the decorative metalwork used on some of our items. Initially, he only did a few pieces of work a month, but as the business grew, he started working out of our shop and now works there almost continually. For tax purposes, should I still consider him an independent contractor, or has he become an employee?
—JK, Lake Havasu City, AZ
A. Surprisingly, determining whether someone counts as an independent contractor or an employee does not depend on the amount of time that person works for a company, or even how or when that person is paid. The decisive factor is how much control the company exercises over that person’s activities for the company. Generally, if you control only the outcome of the work, by accepting or rejecting the finished product, then the person is an independent contractor. If, however, you control not only the finished product, but the means and methods by which it is produced, then the person is an employee. So even if the metalworker spends most of his time working in your shop, if he uses his own tools, sets his own hours, and is not under your control and supervision, he continues to function as an independent contractor. If, however, he uses your tools and materials, during hours you set, and is subject to supervision by company managers while he works, then he has become an employee.
The distinction between independent contractor and employee is an important one for you as an employer. Employers are required to withhold income taxes from an employee’s salary, as well as paying Medicare, unemployment, social security, and payroll taxes on each employee. Employers generally do not have to withhold and pay such taxes on payments to independent contractors. In the event that that you incorrectly classify a worker as an independent contractor, the IRS can hold you liable for that worker’s unpaid taxes in addition to penalties and interest.
The IRS defines four possible categories of workers: independent contractors, common law employees, statutory employees, and statutory non-employees. Statutory employees are workers who might otherwise be defined as independent contractors, except that their jobs have been defined as having employee-status by law. Such positions include individuals working from home using materials and goods provided by an employer and which must be returned to that employer; delivery drivers (except for milk deliveries); full-time life insurance salespeople who sell life insurance or annuity contracts for one business; and full-time traveling or local salespeople who work on one business’ behalf. Statutory non-employees comprise direct sellers and licensed real estate agents, who are, by law, treated as self-employed. Employers must file IRS form 1099-MISC to report payments in excess of $600 made to independent contractors, but generally have no other tax liability, unlike with regular employees.
If you have difficulty determining whether a worker is properly defined as either an employee or independent contractor, or simply don’t wish to risk IRS penalties, you can have the IRS decide the matter itself by submitting Form SS-8. The form asks for a complete description of the worker’s duties, extent of employer supervision, and salary. You can find Form SS-8 and a variety of advisory publications regarding the rules defining employees and independent contractors at irs.gov.