Tax Advantages of Hiring a Freelancer or Agency Instead of Full-Time Employees

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If you’re trying to decide between hiring a freelancer and bringing a permanent employee on board, consider the many advantages of outsourcing. There’s a deep well of talent out there that can handle virtually every aspect of running your business whenever you need it, from digital marketing agencies to accounting services.

Looking at the tax implications of going with freelancers can be wise as well. That’s why Digitally Driven has put together this overview of the tax advantages of choosing freelancers, along with some extra information that can help you make the best choice for your business. 

No Handling of Employee Income Tax Withholdings

As a traditional employer, you have to manage employee income tax withholdings. Along with ensuring the right amount of money is removed from each check, you have to make sure it’s set aside properly, putting it toward their federal income tax payment for the calendar year.

With freelancers, you aren’t responsible for any income tax withholdings. Instead, that burden falls solely on the freelancer, greatly simplifying your tax-related responsibilities.

Don’t Have to Manage FICA Taxes for Employees

FICA payroll taxes – which cover Social Security and Medicare contributions – can be incredibly cumbersome to manage. First, traditional employers have to make sure that the right amount is withheld from employee paychecks. Second, they need to make the employer contribution, too, adding a financial burden.

When you go with a freelancer, you aren’t responsible for any FICA-related withholdings. Additionally, you don’t pay the employer contribution. Instead, the freelancer owes the self-employment tax, meaning they have to cover that amount independently.

Not Paying Employer-Related Taxes

When you hire employees, you have to cover a range of employer-related taxes. Along with a FUTA tax (as well as a SUTA tax, in some states) for unemployment, you’ll have to pay into workers’ compensation funds. With freelancers, you don’t owe any of those taxes. 

Simpler Tax Forms When You File 

While you do have some tax form responsibilities when you hire freelancers, they are usually easier to manage than what you’d need to do when hiring employees. For example, the W-2s for employees are much more complex than the 1099s you usually send to contractors.

Correctly Classifying Workers: What You Need to Know

It’s important to note that you can’t just choose to classify a worker as a freelancer instead of an employee. The IRS has stringent rules that define who is and isn’t an independent contractor.

Usually, the defining characteristic between freelancers and employees is the amount of control each person or entity has over the work and working conditions. Typically, each potential point of control or independence falls in three categories: behavioral, financial, and type of relationship.

Improperly classifying a worker as an independent contractor can come with consequences. Along with owing back taxes, you may have to pay fines or deal with other penalties. 

Other Tax Advantages for Businesses 

Hiring freelancers isn’t the only way to simplify your taxes or reduce your liability. There are plenty of other tax advantages for businesses available.

One prime example is forming a limited liability company (LLC). When a business operates as an LLC, it can capture certain tax advantages, potentially lowering your overall liability. Just keep in mind that state rules that outline the formation of LLCs can vary, so research the standards in your area before you go in this direction.

Additionally, small businesses might be eligible for a variety of deductions. Depending on your situation, advertising, marketing, office supplies, utilities, and similar expenses might be deductible. As a result, it’s wise to take a close look at what may be available to you, ensuring you can capture every savings opportunity that you’re eligible to receive.

Article contributed by Tina Martin of ideaspired.com.