For the real estate investor just starting out as well as for the seasoned, very experienced real estate investor, independent contractors are a smart, popular choice for fulfilling your work force needs. As you take your business planning operational, as an investor with many of the needs, aspirations and resource limitations of a typical small business owner, you seldom have the desire or the need to hire traditional employees to work your business. Independent contractors are often hired for their value to provide their service expertise in certain essential business functions, freeing up the investor to maximize his own business value to his enterprise.
There are always pros and cons to consider when a business owner weighs the consequences of hiring an independent contractor.
For a real estate investing business to succeed, the investor must leverage and integrate the labors and skills of others to maximize their talents and efforts with his while he runs the business within effective time management. New full time employees can be a great boon for the business. However, to bring on board a full time employee may not be a practical, financial reality for the dollars involved. Independent contractors, on the other hand, can and do offer a most sensible solution to your staffing needs.
By no means a guarantee, an investor will often discover that hiring an independent contractor is far more cost effective and practical than an employee when all the costs and benefits are weighed. Although it may be true that the wages of a hired employee may be less than that of an independent contractor, a trade off for the job security of that position does not balance the negatives that are otherwise there. Employees bring with them the added paperwork and costs attendant to having that status with you. Most full time employees expect benefits such as health care and vacation time. You need to pay their salaries or wages on time even if the business cash flow is extremely tight. Not only must there be a monetary reserve on hand to cover such costs in your operating account, you have to address and account for all the payroll paperwork legally required. You have to withhold your employees’ taxes, social security, and Medicare. There is the bookkeeping and/or accounting component with all this adding to your expenses.
Although the per service or per hour cost may be more at the outset with the independent contractor, you will likely save money overall since you do not have to commit to a given salary or weekly work time; No work benefits either, to pay, adding to the operating costs of doing business. You have the greater flexibility to use them only when needed and only to the extent required. You can have the right person to handle the tasks that need to be handled in a certain way and in a timely, cost productive manner, contracting with someone with a specialized skill set, experienced track record, with no need for you to train them at some expense to you.
You do have some control over how their tasks are performed, you may guide them bit, but they seldom are on site and run their business their way. They are hired guns with no real sense of company loyalty.
The problem is often the IRS and tax related issues. A company does not have to withhold taxes or pay benefits to an independent contractor. The IRS can and sometimes does question the independent contractor status and that can mean the increased likelihood of a tax audit and harsh penalties if you have an employee disguised as an independent contractor, even unknowingly. Investors need to be aware the guidelines are hardly clear-cut.
The person is likely to be deemed an independent contractor if he or she controls his or her own working hours, how the work is to be done, provides their own work equipment and supplies, and hires their own assistants to perform contracted for tasks they are responsible for. They maintain their business away from the corporate offices. They are paid on a per job or commission basis and can work with other companies as well. Most importantly, a written and executed Independent Contractor Agreement is in place. That contract should be expressly entitled “Independent Contractor Agreement”, should clearly state that there will be no federal withholding of benefits, and that the terms and information shared are confidential with an agreed upon non solicitation clause.
In the end of the day, different factors will determine whether or not to hire is an employee or independent contractor. Stack the deck in favor of a clear recognition of independent contractor status and you should be fine. The key then is to tailor that Independent Contractor Agreement expressly for the purposes intended. A sound agreement, duly executed, is a secure one.