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I have a question about hiring employees. Some people I know only go with "subcontractors" that they pay on a 1099. The advantage they say is not having to hassle with witholding, not having to pay social security taxes, and easier paperwork. Others pay people only on W2's as employees - their rationale is that if the IRS catches you, you can have major problems with subcontractors if they fail to meet the proper criteria.

I am engaging a payroll service again, and the paperwork for paying people is pretty simple with that type of system. The big expense is the Social Security tax from what I see, but I understand that if I get nailed by the IRS I would have to pay that tax plus penalties. Is there something I'm missing that I should use "subcontractors" instead of employees?

One problem I have is that I pay a lump sum for tasks done to my subcontractors. It allows them to work their own schedule, and I don't have to worry about how much time it takes them to do a job. If it takes them less time, they make more. If it takes them more time, they make less. If I go to paying an hourly wage, I run into the risk that the employee may "milk" a job that I've quoted for a lump sum to a customer. If that happens, I loose money.

I worked for an engineering firm years ago that had a couple of employees that seriously milked jobs they got assigned to. It blew the costs way out of whack, and caused us to lose money on many of the jobs. I'm not in a position to directly supervise anyone that works for me, in most cases they are quite remote. Going with a fixed salary doesn't work, because I only have part-timers right now, and the work available varies from week to week.

Any suggestions, thoughts?


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