Tax Advantages Your Business Receives From Contracting With Freelancers

Tax Advantages to using contract workers

BUY USA LEADSUS Tax Advantages Your Business Receives From Contracting With Freelancers Instead of Hiring Full-time Employees.

As a small business owner, you likely are always looking for ways to save your company money — especially on taxes — while still providing a superior product or service to your customers. One of the best ways to do this is to contract with freelancers instead of, or in addition to, hiring full-time employees. If you have never considered this option, you may be surprised at just how much it can save you. Strategic List Services, for instance, can put together target lists on your behalf to elevate your direct marketing efforts.

Freelancer Definition

A freelancer, aka an independent contractor, is someone who works for you on a contract basis as opposed to being one of your employees. Once accounting for only a minor segment of the workforce, the number of independent contractors has grown dramatically in recent years, resulting in what many business analysts call the gig economy. In fact, many experts project that this new economy will grow to $455.2 billion by 2023.

Tax Advantages Freelancers Provide Your Business

The main tax advantages of freelancers are twofold. You don’t have to pay the employer’s half of FICA taxes, i.e., Social Security taxes and Medicare taxes, since you are not the freelancer’s employer. Nor do you have to pay unemployment taxes on these workers.

Additional tax-related benefits include the following:

  • Simplified payroll processing, since you don’t have to withhold federal or state taxes from their “paychecks”
  • Simplified tax form preparation, since the 1099-Misc you send them requires only listing the gross compensation you paid them in a given tax year
  • Simplified tax reporting, since you don’t need to send a 1099-Misc for any independent contractor to whom you paid less than $600 in a given tax year

Your company likewise saves money by not having to provide workers’ compensation insurance or employee benefits to freelancers. In addition, you save on labor costs, which some experts estimate account for up to 70% of your business costs.

Additional Ways to Save Taxes

Be sure to take every business deduction to which your company is entitled. Another good way to save taxes for your company is to set it up as a limited liability company. This allows you to avoid the double taxation a corporation subjects you to. However, be aware that each state has its own regulations regarding how to set up an LLC. Here’s a Washington State LLC guide to getting you started.

Misclassification Woes and Classification Criteria

Keep in mind that the IRS looks closely at how you classify the people who work for you. Should it determine that you misclassified an employee as an independent contractor, you likely will have to pay the back unemployment taxes you failed to pay for that worker.

Independent contractors are differentiated from employees based on how much control you exert over them. As the name implies, they have more independence than employees. When it comes to freelancers, you do not:

  • Set the number of hours freelancers work each week
  • Dictate which days of the week they work
  • Control when they take vacations
  • Provide them with a workplace
  • Provide them with the equipment, tools or supplies needed to do the job
  • Control how many companies they contract with
  • Control if and when they can quit

The freedom independent contractors enjoy also benefits you. All in all, if you do it correctly, contracting with freelancers to perform much of the work your company does can greatly increase your company’s profitability. It can also allow you to grow without incurring any additional tax liability.