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The Top Tax Advantages of Working With Freelancers and Consultants

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Katie Conroy

Katie Conroy

Guest article provided by Katie a contributing author and is not affiliated with Desert Financial & Tax Services.

Companies need workers in order to achieve their goals, generate revenue, and market and grow their businesses, but hiring employees isn’t cheap. After taxes, insurance coverage, and employee benefits, the cost of hiring a full-time or part-time worker surpasses the employee’s annual salary by 1.25 to 1.4 times — notes Barbara Weltman of the Small Business Administration (SBA).

However, there’s one way to avoid these added costs of hiring an employee: work with freelancers and consultants. Today, Desert Financial and Tax Services outlines the top tax advantages of hiring freelancers over full-time or part-time employees.

Who Qualifies as Independent Contractors?

Before we discuss the benefits of working with consultants and freelancers, let’s take a moment to define independent contractors and employees. According to the Internal Revenue Service (IRS), independent contractors are self-employed individuals or entities who are contracted to do work as non-employees — making them subject to paying self-employment taxes. Employees, on the other hand, are hired to perform services under the control of an employer. Employees are not required to pay self-employment taxes, but their earnings are subject to income tax, Social Security tax, and Medicare tax withholding.

When hiring an employee or an independent contractor such as a consultant, it’s important to correctly classify your workers — as failure to do so could result in the payment of hefty fines, unpaid wages and insurance premiums, and back taxes. Therefore, it’s important to fully understand your employment tax obligations when hiring independent contractors. It’s also helpful to brush up on the basics of property taxes  — especially if you work out of your home, since that means a portion of your property taxes can probably be deducted.

The Tax Benefits of Hiring Consultants

Now that you understand the differences between independent contractors and employees, it’s time to highlight the many ways in which working with consultants can benefit your business at tax time. Here are several benefits to consider:

  • Freelancer tax forms are simple to complete. When hiring a freelancer, you’ll send him or her IRS Form W-9 rather than a W-2. And if your freelancer earns more than $600 in a single calendar year, you’ll send him or her Form 1099-NEC at tax time and file that same form with the IRS.
  • Fast and easy payroll processing. Since payroll taxes, income taxes, and other deductions are not withheld from your freelancer’s paychecks, the payroll process is much simpler when working with independent contractors.
  • FICA tax savings. When you hire independent contractors, you’re not required to pay FICA taxes on behalf of your freelancers. Instead, your freelancers pay self-employment taxes to make contributions toward Medicare and Social Security.
  • Additional cost savings. By working with freelancers rather than employees, you’ll avoid the need to pay federal and state unemployment taxes, workers’ compensation benefits, and employee benefits such as paid time off (PTO), health insurance coverage, and retirement savings plans.

In addition to these benefits, it’s important to understand some of the disadvantages of hiring freelancers. As one disadvantage, you’ll have a lot less control over your workers — and the quality of work may vary widely. Moreover, retaining your best freelancers may be a challenge — and you may run into security issues if your independent contractors are working from home.

Other Ways to Save on Small Business Taxes

Working with freelancers can save your business a great deal of money, but there are some other steps you can take to gain advantages at tax time. As one option, forming a limited liability company (LLC) helps you to avoid double taxation — which means you’ll pay business taxes through your personal tax return. You’ll also qualify for a number of business expenses and deductions, such as rental payments, utilities, startup costs, and office supplies.

To save even more, you could claim business tax credits and set up a retirement plan for yourself and any employees you may have. Just remember that your freelancers won’t have access to your employer-sponsored retirement plans.

In Conclusion

If you’re ready to hire freelancers for your small business needs, you can use websites and job portals to begin your search. For instance, when you’re reviewing these software developers, make sure you pay attention to each freelancer’s areas of expertise and years of experience, and you’ll be able to gauge how much they charge. Soon you’ll be in the interview stage and, in no time, you’ll be able to bring on the qualified talent.

From the financial savings of working with freelancers and consultants to the flexibility of hiring an independent contractor from nearly anywhere in the world, there are so many advantages of hiring a freelancer or consultant over a full- or- part-time employee. You’ll save money on taxes, reduce payroll stress, and spend less time managing your team — as freelancers require little supervision from their clients and customers.

Desert Financial and Tax Services provides financial guidance and tools to aid individuals in becoming debt-free. Reach out today to get started!

Desert Financial and Tax Services provides financial guidance and tools to aid individuals in becoming debt-free. Contact us today for more information! (928) 315-0040.

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