Recently, my business Veritas Buyers grew to a point where I could no longer manage everything myself. In order to keep my sanity, I realized I needed a little extra help with small tasks such as bookkeeping and tracking receipts. Originally, I had a lot of misconceptions when it came to hiring. I didn't even know the difference between an employee versus an independent contractor. I discovered the correct way to get part-time help was by hiring a 1099 independent contractor.
Once you've decided to hire, it's still unclear what is the best way to pay a contractor, track payments, and manage taxes. I read various articles that went into lengthy details about taxes and payroll, but few of these articles explained I could automatically submit payments and file tax documents when hiring a 1099 contractor by using Square Payroll software built for small businesses. By leveraging payroll software, I was able to focus on my business rather than dealing with the administrative overhead of writing checks directly and tracking payments in a spreadsheet.
Having just gone through this process myself, I will teach you:
How to differentiate a contractor versus an employee
Why you should let Square Payroll handle payments and taxes
What are alternative ways to hire a 1099 contractor
Choosing a solution that's best for you
Determine if the Worker is a Contractor Versus Employee
In general, a worker can be labeled as a contractor if they provide part-time help that is not part of your core business functions. In my situation, the person I hired was focused on helping me with a little bit of bookkeeping and filing receipts. The work I requested was ad-hoc and the person only helped me when they had time, so the arrangement made sense as a contract. Furthermore, the focus of my business was real estate investments, and the worker was focused on tasks not related to core business functions. In contrast, if my business was an accounting firm with bookkeeping services that brought consistent work, it might make more sense to classify the worker as an employee.
The IRS really wants to know if the person you're hiring would qualify as an employee versus 1099 independent contractor, as this would change how taxes are collected and possibly the amount. The IRS provides a detailed breakdown explaining the difference between an employee and an independent contractor. I also found reading various facts and historical context on independent contracting on wikipedia enlightening. However, if you're unsure whether the person you're hiring would qualify as an independent contractor, I highly recommend you speak with your accountant or you can submit IRS Form SS-8 at any time.
Let Square Payroll Handle Payments and Taxes
If you read other articles about hiring an Independent Contractor, they talk at length about tax details and everything to worry about. They share you need to submit a W-9, get Social Security #s, EINs, possibly hold back taxes, etc. The more I read, the more I felt anxious and wondered if I was going to miss a step due to some important government document.
What those articles didn't tell me was there are services, such as Square Payroll that handle all of this personal information, accounting, and data collection automatically for you on your behalf. Not only would Square Payroll submit the 1099 to the IRS, but I could link my bank account and turn on a timesheet so that the contractor could track their hours themselves. This eliminated my concerns around setting up a spreadsheet and having to manually send payments via check. Square Payroll only costs $5 per month per contractor. Knowing that Square would collect the W-9 and submit the 1099-MISC form to the IRS, I found the price to be worth it.
Alternative Ways to Hire a 1099 Contractor
Before I learned about Square Payroll, I had explored other ways to pay an Independent Contractor. Next, I'll detail my findings and the pros and cons from my personal experience:
Write a Check
Originally when I decided to hire, I thought I could just write a check, because I was familiar with writing checks and I knew that unlike credit cards, there were no fees. However, my main concern with checks was that I would have to physically mail them and track each payment. Also, I had the challenge of dealing with tax forms and time cards manually, which probably meant I would need to bring in an accountant who charged over $100 an hour to review and make sure I did not miss anything.
Send an Electronic Check
After deciding that physical checks were too much hassle and that Upwork charged too much, I wondered if I could use Paypal to send an electronic version of a check. However, money sent through Paypal to a contractor is classified as a commercial transaction. In other words, freelancers using Paypal have to pay a 2.9% transaction fee + a fixed fee of $0.30. While this might be acceptable if you had a small online store selling products, I still did not like the idea that the person I was hiring had to pay a fee on top of the money we had agreed for the contract.
Hire through Upwork
In the past, I've hired freelancers through Upwork. I liked that Upwork was a full-service solution with payments, tax filing, and timesheets. The time tracking software could even support screen recording snapshots when the contractor worked. There was also an added benefit that if I left a 5-star review, the person I hired could use the platform to find more work. However, what I didn't like was that Upwork charged a 20% fee on the first $500 billed to a client, followed by 10% for the first 10,000, and 5% after that amount per client relationship. While maybe this makes sense if I had found the contractor through Upwork, this fee structure felt way too high.
Choosing a Solution that's Best for You
It can be hard to find the right balance between cost and a solution that reduces the administrative overhead of hiring an independent contractor. I decided to move forward with Square Payroll because they charged a fixed rate of $5/month and they did not take any money from the contractor. I now have the peace of mind that all the paperwork would be handled and I could go back to focusing on building my business.
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