Before making this decision, I hope you obtain some expert assistance from whatever local resources there are in your area for developing a business plan that includes projections of profitability.
I think you need to look at both models from the perspective of which practice will enable you to succeed. That is, if you are footing the bills for marketing, advertising, billing, administration, etc., and assuming the risk of customers being demanding and/or not paying you and so forth, is a 50/50 split even fair to you?
So, where did you come up with the 50/50 split idea? You might be better off determining what pay rate is fair for each tech based on what he or she is capable of doing and the rates you can charge your customers for that kind of work.
It's easier in many respects to use contractors versus hiring employees, as many employment laws will apply to you as soon as you hire even one person (e.g., Fair Labor Standards Act, Federal Income Tax Withholding, Uniformed Services Employment & Re-employment Rights Act, etc.). You may also have the added financial burden of paying employees when business is down and you have no actual work for them to do.
You might tell each tech that he or she needs to incorporate and bill you for his or her time at a rate agreed upon in a professional services agreement that you execute with each contractor. The agreement should stipulate that they carry sufficient insurance, understand that they are responsible for their own income taxes, and so forth.
They can bill you for their time specifying which project they worked on. Then you can charge each customer for that hourly contractor rate plus an overhead per hour/per project amount that you know is required for you to be profitable.
The benefits of having a contract (1099) worker is that the company doesnt withhold income taxes, doesnt withhold and pay Social Security and Medicare taxes and doesnt pay unemployment taxes on what a contractor earns. Contractors like it because their untaxed checks are greater than they would receive for the same work if they were employees.
If you do use contractors versus employees, be careful to understand and abide by the federal and state laws. An independent contractor must be just thatindependent. It is very important to make the distinction properly.
Contractors should all have specific, self-determining kinds of work to do, normally in a finite time period, with defined deliverables, using their own place of work, and so forth. If you look at Section Two of
Publication 15 you will see exactly what the IRS considers when determining whether a worker is an employee or an independent contractor (i.e., 1099 worker).
In addition, the IRS will help an organization free of charge to determine the appropriate classification for a worker or group of workers in the organization as regards federal law. To obtain that service, you simply complete and submit
IRS Form SS-8 to the IRS.
However, your state may have more or different requirements. Remember that it is not uncommon for a worker whose contract period has ended to apply for unemployment insurance benefits with a state agency. Then, when officials do not find any earnings reported for the worker, an investigation ensues. For misclassifications, the payouts most often involve benefits and lost wages including unpaid overtime. So, do your homework before setting up your techs as contractors.
Penny is a seasoned human resources executive and consultant with over 25 years of diverse business experience in advising enterprise leaders on employment-related matters.
