As the holidays approach and consumers across America start to stretch for their Black Friday sprints, business owners are busy preparing. Getting the right inventory on the shelves, making holiday schedules for employees, and launching marketing campaigns to get new customers in the door are all a part of the business owner’s long to-do list at the end of the year. So is making sure that they’ve got enough employees to help them through their busiest season.
Businesses have several options to help them get through the holiday rush. They can lean on their regular staff and offer them some additional hours, or they can bring in seasonal help to get them through. If you choose to go the route of hiring temporary help, there are some legal and tax considerations to keep in mind. But don’t worry—if you’ve mastered payroll, you’ve got this.
Is a Part-Time Employee a Contractor?
When it comes to seasonal help, you may hear the word “contractor” or “contract employee” quite a bit. Contractors are often associated with short-term, temporary help. But if you’re hiring someone part-time to work in your store for a few months, does that make them a contractor? Not necessarily.
There are a few key qualities that define a contractor and differentiate them from employees (part-time or full-time). Here’s where they differ:
|Set their hours?||For the most part, employees show up when they’re instructed.||Contractors generally set their own hours.|
|Decide where they work?||Employees usually come to an office. If remote, it’s likely at the request of the employer.||Since contractors often work for multiple companies, they are not required to work from one location—though they’re notorious for loving coffee shops.|
|Decide how they work?||Employers dictate the work that needs to be done and when to do it.||Contractors may have deadlines, but they can decide what they work on and when they work on it.|
|Provide all necessary equipment?||Employees are provided the things they need to work effectively, including computers, phones, walkie talkies, etc.||Contractors bring their own supplies and tools. The company paying them usually only covers compensation.|
So you can see how a part-time retail employee would not be classified as a contractor, since they’d need to be in the shop during regular retail hours and follow specific customer service processes while there. They’ll also expect you, the employer, to provide the price tag scanners. A contractor, on the other hand, would be better suited for things like graphic design or social media—things they can do in their own time, at their own pace.
If you decide to hire part-time, temporary employees, you’ll treat them as you would long-term employees, adding them to your payroll and filing taxes on their behalf. Contract employees, however, are treated differently by the IRS.
Collect The Proper Forms Up Front
If you have several employees, you’re probably very familiar with the W-4 Form, which gathers all the information you’ll need for payroll (like how much to withhold from each employee’s paycheck for taxes). And if you’re considering hiring contractors, you’ll want to familiarize yourself with the W-9 Form as well.
The W-9 Form gathers important information from your contractor that will make it easier when it’s time to file taxes and report their work to the IRS. Contractors are responsible for paying their own taxes, so you don’t need to worry about withholding tax payments from their compensation. But you will have some paperwork to do.
The holidays are a busy time, and while it may be tempting to skip the red tape and get someone working for you as quickly as you can, resist that urge and make it a practice to collect W-4 or W-9 Forms from every worker you deal with.
Be Diligent About Sending 1099s to Contractors
January will be here before you know it. And while you’ve done the work all along of withholding wages for tax payments for your normal employees, you’ll need to do some work in January to help your contractors file their own taxes in the Spring.
The general rule of thumb is that you’ll send 1099 Forms to all contractors that you paid $600 or more during the previous calendar year. If you paid a contractor three payments of $250 in 2019 (or $750 in total), you’ll need to send them a 1099 Form in January 2020.
Everything on the 1099 Form will come directly from those W-9’s you collected when they started working. So the more organized you are about that process, the easier your January tasks will be. After a busy holiday season, business owners deserve a break, too. Don’t make the start of the year more stressful than it needs to be.
Hire the Right Amount of Help
When it comes down to it, the paperwork required to hire temporary help is not the hardest part of the process. For most business owners, the difficulty lies in getting the right amount of help. In other words, knowing exactly how much help they need—and how much they can actually afford.
There are dozens of ways to calculate how much you’re spending on labor, and it’s easy to get lost in the weeds. So we’ll keep this simple and focus on one metric: the labor-to-revenue ratio.
Labor-to-Revenue Ratio = Labor Costs / Revenue
Labor-to-revenue simply looks at how much you spend on labor vs. how much you bring in through revenue. Take a look at your financial statements from the last several months to get a sense for your baseline labor-to-revenue ratio.
Now, start to look at your projections for this year’s holiday season. (Hint: If you don’t have detailed projections and forecasts, start by looking at last year’s revenue.)
Based on your expected revenue, you can use the labor-to-revenue ratio to help calculate the amount of labor you can afford.
Labor-to-Revenue in Practice
For example, if your labor-to-revenue normally hovers around .25 (meaning 25% of your revenue is spent on labor) and you expect holiday revenues around $300,000 this year, here’s how you can find your labor budget.
X (Labor Costs) / $300,000 (Budgeted Revenue) = 0.25 (Your Typical Labor-to-Revenue Ratio)
X (Labor Costs) = 0.25 * $300,000
X (Labor Costs) = $75,000
This means, you’ve got about $75,000 to spend on labor before you start to stray from your normal labor-to-revenue ratio.
As mentioned before, there are countless ways to slice, dice, and analyze your labor costs. However, if you’ve been operating on gut instinct in the past, adopting the labor-to-revenue ratio as a starting point will be a big step in the right direction for labor planning.