Selling on eBay can be very labor-intensive. Sooner or later, you'll be tempted to hire employees to do the "dirty work" (creating listings, packing boxes, answering e-mails from buyers) so you can free up your time to do the more important stuff (sourcing the right products, marketing your eBay Store). Life becomes a lot more complicated, though, when you hire your first employee. Here's a checklist of some things you need to think about first.
1. Can You Afford This Person? Employees cost money. You have to pay them a salary, overtime and basic benefits (such as workers' comp). You have to pay employment taxes on their income and provide them with equipment, supplies, a cubicle and so on. If an employee is not generating enough additional income for your business to cover his or her costs, the shortfall is coming out of your pocket. As a rule of thumb, each employee you hire should generate enough additional income to cover two to three times their base salary. If that's not likely to happen, don't hire anyone.
2. Consider Independent Contractors. By hiring someone as an independent contractor, or "1099," you don't have to withhold income taxes or pay employment taxes on his or her compensation. But you can't "direct and control" the person's activities: Contractors get to set their own hours and must be able to work for other employers. If you are telling someone what to do, when to do it, how to do it and where to do it--even if only for a few hours each week--that someone is an employee, not an independent contractor. Even if the person signs a contract saying he or she is an independent contractor and will pay their own taxes, the IRS has the power to disregard the contract if it suspects you are actually directing and controlling the contractor's activities. The IRS audits very aggressively in this area, so you can't afford to make mistakes. If you're not sure of a person's status, talk to an employment attorney.
3. Hire a Payroll Service. When you hire an employee, you're required to withhold both federal and state income taxes from his or her wages. In addition, you must pay federal employment or "payroll" taxes, which come in three varieties: social security tax (FICA), federal unemployment benefits (FUTA) and Medicare.
These three taxes come to about 15.3 percent of each employee's total taxable wages, and they must be paid on time. If you are even one day late paying your employment taxes, you will hear from the IRS.Because of the strict penalties the IRS imposes on late payments, most small employers hire a payroll service to register for federal and state employment taxes, deal with the paperwork, and make the tax payments on schedule by debiting the employer's checking account. The three most popular payroll services are ADP, CompuPay and PayChex. If you have fewer than five employees, a local bookkeeper or accountant may also provide payroll services--just make sure they have backup support if they fall ill or go on vacation. For more information about payroll taxes, see IRS Publication 15 (Circular E-"Employer's Tax Guide").
Cliff Ennico is a syndicated columnist and author of several books on small business, including Small Business Survival Guide and The eBay Business Answer Book. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.