7 Ways to Avoid Employment Disasters
Companies have tons of legal requirements to keep running...but as big picture people, many entrepreneurs tend to HATE the detail work like tax code, compliance, and 401k structure. Some even tend to let those things slide. It's not rocket science but there are lots of regulations that can quickly undermine your business, often in a devastating way.
This week I teamed up with Isaac Oates, co-founder of Justworks. His company provides benefits, compliance, and payroll solutions, so he makes it his business to know the tax codes of roughly 5,000 city, state, and federal authorities. He and his team help small to medium-sized companies manage those tiny little details that keep business owners happy and compliant.
In order to make sure companies are in top form, Isaac helped me outline 7 potential disasters that you can avoid with a little forethought and help from the right people.
1. Pay contractors as contractors and employees as employees. Companies have different tax responsibilities for independent contractors than they do for full time employees. If you misclassify your workers, you may be liable for additional taxes and penalties at both the state and federal level. And the IRS keeps score: because you have to file a 1099 form for every contractor you've paid more than $600 over the course of the year, the IRS stores the information in your files and uses it to flag taxpayers who are underreporting earnings. Here is a page on the IRS website that clearly explains the difference.
2. Understand who gets hourly wage and who gets salary. The Fair Labor Standards Act (FLSA) requires some types of employees ("nonexempt") to be paid an hourly wage so they can qualify for overtime if they work more than 40 hours a week. Other types of employees ("exempt") are not eligible for overtime pay. For example, a sales consultant might be exempt, but a customer service rep working in a call center will most likely be nonexempt. Every field, company, and job differs depending on the kind of work being done. Educate yourself on the pay structures that are most appropriate for the people who will work for you in your specific industry and organization.
3. Speaking of overtime...pay it properly. Overtime rules seem overly complex to lots of employers. But there are benefits to being scrupulous about compliance. You won't end up owing back pay for mistakes or oversight, and you will save on both on workers compensation insurance and on the timing of payments. Justworks has a great blog post to help you calculate proper overtime.
4. Get the mandatory insurance. Every business is required to get certain types of insurance; you need to know what is required for your specific industry and stay on top of it. Failure to be properly insured can burn you down in more ways than one. Whether it's an issue of workers comp, liability, or employee practices, there are no shortage of lawyers waiting to pounce and take everything you have that's not nailed down. Get covered and so you can stand strong when the subpoena comes.
5. File the I-9. The what? This little known form, required for each employee, states their eligibility to work in the U.S. Even if your workers were born in Smallville, Iowa you need to have an I-9 for each of them. Keep it on file in your office in case an immigration audit ever comes your way.
6. Hire interns legally. After recent, public brouhahas over intern abuse at a number of major companies, it's in your best interest to make sure you are compliant with the law. Unpaid interns present a very tempting option to most employers. Who wouldn't want a young, eager worker who is willing to forgo cash for experience and a resume credit? Remember--these young folks have rights, which the FSLA has clearly laid out. You can find these guidelines, including a clear six-point test, here.
7. Pay employees from a separate account. Lots of start-ups and small businesses use the owner's checking account to pay employees. It seems a lot simpler in the short term. But your accountant won't thank you for it when they have to go in at year's end and sort out personal from business expenses, plus handle the employment taxes. If you really don't want to handle it yourself, invest in one of the many online payroll services out there.
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