person at a desk, writing on a notebookGuest blog by Tina Martin

Running a small business today looks a lot different than it did in the past, thanks in large part to the popularity of the gig economy. One way that many business owners are using the gig economy to break the mold is by hiring freelancers rather than full-time employees. There are many benefits to going with a freelancer, and at the top of that list is the tax savings for you as a business owner.

Why (And How) to Hire a Freelancer

Saving on taxes is just one way that hiring a freelancer is a good move for your bottom line. When you decide to hire full-time employees, the entire hiring process is complicated and costly. Between advertising, investing in office tools, and going through the administrative task of filling out tax forms, you’ll be out a good deal of time and money by the time you bring someone on board.

However, when you hire a freelancer, most of the headaches and costs associated with hiring don’t exist. Because so many talented people are now working in the gig economy, you can connect with these individuals easily through job boards that are designed just for that purpose. These staffing firms provide a platform for qualified candidates to advertise their experience, and you as the business owner can search for the one who meets your needs, whether you’re looking for web development, writing, or sales and marketing services.

Often with small businesses, what you need is help with a short-term project that’s outside your skillset, such as web design. Or maybe you need someone consistently for a role that can be done remotely, like marketing or administrative help. Regardless of the need, there is an experienced candidate out there who is perfect for it.

The Savings of Hiring Freelancers Add Up

Besides avoiding hiring costs and saving you time, working with a freelancer also saves money on an ongoing basis. Freelancers typically set their own rates, and when you search for candidates, you may find that their per hour rate is more than you’d expect. Don’t let the “sticker price” shock you, though, because you will still pay less overall than you would for a full-time employee. Think about what most companies offer in benefits, such as paid time off and healthcare, on top of the tax obligations. For this reason, NOLO estimates that you save 20-30 percent on payroll costs.

The primary burden of these payroll costs involves taxes. While local and state taxes vary depending on where you live, this is a general breakdown of the requirements you can expect from hiring employees:

FICA

According to the Federal Insurance Contributions Act (FICA), employers and employees have a shared tax obligation that includes a tax for Social Security and one for Medicare. You are required to withhold a percentage from the employee’s compensation, and you are also required to pay a percentage as the employer.

Unemployment Taxes

Employers are also obligated to pay a Federal Unemployment Tax (FUTA) and State Unemployment Tax (SUTA). In most cases, the FUTA rate is a flat six percent, but this can change depending on your state’s unemployment tax requirement.

A Few Things to Keep In Mind…

Understanding IRS Classification

Before making any new hire, be sure you have a clear understanding of how the IRS classifies the difference between a freelancer (or independent contractor) and an employee.

Know Your Liability

If you still have concerns, the U.S. Small Business Administration addresses some common misconceptions about payroll taxes. For example, some business owners mistakenly assume that having a payroll service means you are not liable if you have mistakes in withholding or payment of taxes. The last thing you want is to find out (after the fact) that you didn’t actually have your bases covered.

Tax penalties for making the wrong move can be a heavy burden for small businesses, but that doesn’t mean that hiring traditional employees is bad. It just means that you have additional responsibilities, not to mention costs. These are just a few reasons why the tax advantages of hiring a freelancer can be the best choice for your business.

Photo credit: Pixabay

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