Hot Topics:

Plan to Hire an Assistant? Know the Employment Laws

Experts discuss the legal considerations of becoming an employer.

You may find that when your online business reaches a certain size, you can’t handle all the aspects of your operation—shipping, creating listings, packing, sourcing, etc.—on your own. You need help, so you decide to hire an assistant.

You get the word out that you’re looking for help, you meet with applicants and you hire the right person. Then you start training, discuss your assistant’s work schedule and you’re all set. Or are you?

Not really. There are laws related to employment and taxes to keep in mind as you iron out the details of your working relationship. Not doing so could get you into trouble with the IRS. We talked to two experts to learn about the legal considerations of hiring an assistant and share their insight on employment laws with you here.

Employee or contractor?

The first thing you’ll need to do is figure out if your assistant is an employee or a contractor. There’s a difference, and it’s an important difference.

But the number of hours your assistant works with you isn’t the deciding factor, say our legal experts, Cliff Ennico, an attorney and author of “The eBay Seller’s Tax and Legal Answer Book,” and Tom Copeland, an attorney and author of several books on family child care business issues.

Making the wrong determination could be costly.

“The IRS penalties are very severe,” Ennico says. “If the IRS reclassifies an ‘independent contractor’ as an ’employee,’ you will have to pay all back withholding taxes you should have paid for the employee, plus interest and penalties in an amount that may shut down your business.”

“If you direct and control what your assistant does, the hours she works for you and when she gets paid, you likely have an employee”

And if an employee gets injured on the job and has no workers’ compensation insurance, “the state workers’ compensation office will make the employer pay the entire medical bill and charge a stiff fine, [which] can be thousands of dollars per day!” Copeland adds. “If an employee injures someone else while working, the person injured can sue the employer and, without business liability insurance, the employer can lose everything.”

Ennico tells us that if you “direct and control” what your assistant does, the hours she works for you and when she gets paid, you likely have an employee.

An independent contractor can work for others, schedule her own hours—you can’t force her to work specific hours—and she will use her own equipment to do tasks. She won’t be using your camera to take photos. Plus, she’ll bill you, instead of you handing out a weekly paycheck.

Copeland adds that if the person you hire is registered with the state, has her own business name and an Employee Identification Number, she’s likely an independent contractor.

These are just a few guidelines, though. You should seek the help of a tax professional to make sure you’re giving your assistant the right title. You can also ask the IRS to make the choice for you by filing a Form SS-8, Ennico says.

Before you do that, though, be aware that the IRS will usually classify workers as employees, unless it’s beyond a doubt they are independent contractors.

So “if your assistant has been working with you for some time, [and she is reclassified], you may be waking up a sleeping Rottweiler by filing Form SS-8,” Ennico adds.

Taxes and withholdings

If you decide you’ve hired an employee, you’ll need to register for federal and state employment taxes, and with your state unemployment compensation systems, Ennico tells us. Registration forms will require that you estimate your payroll for three, six and 12 months.

You should also know about the legal rights employees have—and keep in mind that these vary by state.

One of these is workers’ compensation, which is in place in case workers get hurt on the job. It’s a right for employees in most states, and you will have to pay into your state’s unemployment compensation insurance. Also, if you fire your employee for a reason that’s unrelated to job performance, she would be entitled to unemployment benefits, and you’ll have to pay the state back for those, Ennico notes.

For employees, sellers also have to withhold income taxes, social security taxes, federal unemployment tax and Medicare taxes. That will be about 15.3 percent of the employee’s taxable income. This can be very complicated, so Ennico recommends you don’t do it yourself.

“Your accountant or a payroll service such as PayChex.com should be doing the job,” he adds. “The rules on employment taxes are extremely complicated, and it is well worth the money you pay these folks to make sure you are in compliance.”

“The rules on employment taxes are extremely complicated, and it is well worth the money to make sure you are in compliance”

For independent contractors, you don’t have to pay into social security or Medicare taxes, state unemployment or workers’ compensation, according to Stephen Fishman, a legal writer and the author of several legal business books.

“An independent contractor is required to withhold taxes on their income, so you are not required to do that,” Ennico adds.

Reporting to the IRS

You should also note that if your assistant is an employee, you will have to pay quarterly employment taxes using the IRS Forms 940 and 941, Ennico notes. At the end of the year, you’ll need to send a W-2 Form—which documents your assistant’s earnings throughout the year—to both your employee and the IRS.

You have to send a different form to your assistant if she is a contractor, so she can file her income taxes. That would be Form 1099, which you should send out in January of the following year you worked with your assistant. Like the W-2, the Form 1099 shows what you paid your contractor over the year, Ennico reports.

Other things to keep in mind

Copeland says you should also buy business liability insurance if you hire someone.

“An employer can be held liable for any actions of their assistants,” he adds. “Employers should pay close attention to any state requirements when hiring employees.”

They should also do background checks to sidestep potential problems.

Helpful resources

The legal issues when you hire an assistant can be completed. Read IRS Publication 15, the Employer’s Tax Guide for guidance, or check out Fishman’s book, Working with Independent Contractors. Ennico also has a chapter that discusses the issue in his book, The eBay Seller’s Tax and Legal Answer Book.

When in doubt, consider your assistant an employee, and abide by those regulations to avoid possible run-ins with the IRS, Ennico says.

“That’s the advice I give my clients,” he adds.

Failing to treat workers as employees is probably the most commonly broken tax rule in the U.S., Copeland adds.

“Many employers don’t understand the rules or choose not to follow them because it’s so complicated!” he continues. “This is particularly true of very small employers. In my opinion, there would be more compliance if the paperwork was simpler. It’s not the amount of taxes that is the main problem, it’s the confusing paperwork.”


newsletter signup

About the author

Olga Munoz
Olga Munoz is editor of TheOnlineSeller.com. In addition to writing news and feature articles about e-commerce, selling trends, online marketing and other topics of interest to online sellers, Olga manages the site's social media efforts. A journalism graduate of Chico State, Olga says her favorite part of being a journalist is learning interesting facts that help put stories into perspective, attending industry events and meeting interesting people "that leave you smiling, even in tough situations." Opinions expressed here may not be shared by The Online Seller and/or its principals.



Newsletter Signup

Subscribe!