Delegation, Employees, & Subcontractors – A Discussion

There certainly is opportunity for freelancing as a solopreneur, especially after the COVID-19 pandemic changed the way many businesses get their work done. There are many happy freelancers enjoying exceptional incomes with little or no overhead and working alone. However, if you are growing a business, planning on hiring or hiring others to get the work done and customers served, you should be planning for personnel decisions.

When to Delegate

When a business is in transition from a single operator-owner to a need for others to grow, it is a tough decision and process to take the next step. While profits may be great, what will hiring others do to business cash flow? When is it the right time to take the risk, as too soon can result in negative cash flow and a need to borrow or shut down?

The decision to expand with personnel is not that difficult if you consider two things:

  • Your activities – Have you reached a point where you are spending significant time and effort in activities not directly related to production, sales, and customer relationships? Do a rational and conservative analysis of your workdays and how you spend your time. Can you conservatively see that delegating some of your activities to others would free up your time for direct business generation activities instead of overhead work?
  • Quantify the income component – It is common for an owner to see that they could increase business income and profits if they could free up their time from overhead activities. What is a little more difficult is figuring out how much revenue the change would generate versus the cost to delegate the overhead activities to others.

If your analysis shows that you are on the edge of affordability for delegation, how you do it can make the difference.

Employee or Subcontractor/Freelancer?

The “gig economy” has grown substantially from year to year, and post-COVID the rise in the number of freelancers/subcontractors has been exponential. Almost any activity in your business is probably being provided by independent contractors eager for your business. Advantages of using contracted workers include:

  • Can be hired as needed and only when workload justifies the expense.
  • Typical employee benefits expenses are avoided.
  • Less accounting and lower tax burden without withholding.

Using independent contractors as needed can be the ideal transition for growth at lower cost, but it is critical to understand how the IRS classifies an independent contractor versus an employee. If you hire them as a subcontractor and they run afoul of the IRS rules or they do not pay their Social Security and Medicare taxes, you can be liable for them.

What the IRS Says

The IRS clearly sets out the factors that they use to determine whether a hire is an employee or contractori. A lot of it has to do with how much control you exercise of the hire. You cannot set their work schedules or contribute training to get them up to speed. There are other rules related to both behavior and financial control. Understand them and be sure you are on the right side of them. There is a great IRS set of FAQs to help you with answers to your questions hereii.

If you want to grow your business, do not put it off for affordability until you work your way through this information for a smart decision.

i Understanding Employee vs. Contractor Designation, IRS.gov

ii Subcontractor FAQs, IRS.gov

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