HR Outsourcing
W2 or 1099?
This determination is often made based on the perceived impact to the business. When a business hires its first employee, there are several new requirements that must be met to avoid fines, penalties, and… jail time. Did you know that some pretty serious consequences can happen to those that mess it up? For this conversation, let’s consider “jail time” as very serious!
“I didn’t know”
$50 for each missed W2
1.5% of employee’s wages + interest
40% of employee’s FICA
100% of employer’s matching FICA
“Yeah, I knew it was probably wrong”
20% of all employee wages paid
100% of FICA contributions (both employee AND employer)
Up to $1,000 criminal penalty for EACH misclassified employee
Up to 1 year in PRISON
Resources to help you
Internal HR department
Legal counsel
Online research
All of these resources above are fantastic for helping you decide if a worker should be classified as an employee or contractor. Your internal HR department ought to be able to help guide your decision based on working relationship and roles filled by the employee(s) in question. Your legal counsel will advise you on business risk where the classification argument has some “grey” areas. The internet is full of resources to both help and confuse your efforts here.
Online HR
Not every company has an internal HR department. Not every company has a stack of cash to pay outside legal counsel. You also probably don’t want to spend your evenings doing research on something so detailed and risky.
Instead, what if you outsourced this task? This would allow you to “buy” time from a Human Resource Specialist without putting that person on your payroll. Typically, this can be done cheaper than involving legal counsel without stealing time away to manage your business. Even large companies hire consultants to perform specialized tasks loaded with risk. Let’s begin with a definition of outsourcing and human resources:
OUTSOURCE – “To obtain (goods or a service) from an outside or foreign supplier, especially in place of an internal source.”
HUMAN RESOURCES – “…the people who make up the workforce of an organization, business sector, or economy.”
When you outsource your human resources, you are purchasing services from an outside supplier to manage, motivate and evaluate your resource of human capital. Just like equipment or raw materials, you must treat your human resources (i.e.: your workers) with the same respect and care that you would treat a specific machine or box of eggs! Both examples have acceptable limits of use/friction and areas of maximum efficiency. Drive the machine too hard and it will break early. Bump the eggs wrong and you have a big mess to clean up.
This is the argument for Outsourcing your human resources function and services. Companies that do not have any assistance in HR are like untrained forklift drivers. There will likely be many days that appear just fine! Even for first-time offenders, the Department of Labor is strict to enforce all laws no matter the business size. Just like our grandparents said “an ounce of prevention is worth a pound of cure”.
Is my business a candidate for outsourcing HR services?
All companies that employee people must follow a basic set of rules governed by the DOL, IRS and other acronym government agencies. If you have the experience and time to devote, go for it! Most small and medium-large companies are started by a person with specialized knowledge gained through experience. So, business owners in this realm are experts in their field. Unfortunately, “running the business” can get in the way of actual business!
How many hours did you spend on employment issues last month? Did everything turn out as well as possible, or did a worker get frustrated/demotivated? (Number of Hours)
Compute your personal dollar-per-hour rate for all work you perform that includes managing the business. (Hourly Rate)
Borrow some figures from the penalty of misclassifying of a W2 employee when you thought he/she/they should have been classified as a 1099 contractor. (Business Risk)
What you have now is an equation to measure if you should outsource your HR functions.
[(Number of Hours) * (Hourly Rate)] + BUSINESS RISK = Company cost to keep HR in-house
What does that final number do for you? Review the calculation and formula of your final figure. It is important to identify when it is most appropriate to hire a professional. One person might enjoy basic handyman work around the house. That same person would likely not be as excited to install a new roof. This is why we call on professionals! A roofing crew has the tools, experience, and knowledge to do the same job faster, cheaper, and with greater accuracy than the average person alone.
If the cost to your company is low, take a moment to evaluate if your workforce is motivated, safe and engaged in their work. If that does not describe your workforce, take an inventory on the “health” of your workforce.
