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Our blog today dives into the topic that we believe (because we experience it too) that all business owners struggle with: Payroll. So if you have ever found yourself asking these questions:

  • Who is an employee or who isn’t?
  • What benefits am I supposed to be paying my employees?
  • Who qualifies for paid vacation? Or sick pay?

Then this blog is for you!

When it comes to payroll, you want to make sure that you are doing it correctly because it can lead to some very costly consequences. You do not want to come under the radar of the IRS or the EDD, which is the government agency in the State of California that monitors payroll. The issue that usually comes up for business owners in California is that, where it is paramount not to cut corners and to follow the law, often the law is tough to understand and often changes! Hopefully, we can shed some light for you all today.

Independent Contractors vs. Employees

Most business owners understand that you would know who your employees are and who your independent contractors are, but the IRS gives us three rules on how to differentiate these two parties. 

  1. Behavioral – Do you have control or the right of control over what that worker does and how they do the job? If yes, then you most likely have an employee
  2. Financial – Are the financial aspects of that person’s job controlled by you, the employer? If yes, then you most likely have an employee. 
  3. Type of Relationship – Do you have a contract with this person, or do you have an employee handbook that you’ve given to this person? Do you provide benefits or a pension plan for this person? If so, then you most likely have an employee also, if you pay for a type of training for a person, it puts them more on the side of an employee than a contractor. 

There are a few other factors that you can look at in this debate. Do they have other clients that they provide services to or do they own their own business? Do they provide their private insurance or benefits and do not get them through you?

As a business owner, there are some benefits to working with an independent contractor because it costs way less than an employee does. Whereas an employee gets paid sick time off, you need to put them into your workman’s compensation, and there are payroll taxes. However, because there can be a lot of a gray area in the space, make sure that you are very clear that they are an independent contractor. Do not pay for their equipment, do not set their hours, and not requiring them to behave like an employee. 

To find out more payroll pitfalls, make sure to check out part 2 of our blog coming soon!