Employee or Contracted Services: What Difference Does It Make and Why Does your Lender Care?

Your business has a choice when it comes to workforce:

• Hire employees
• Hire contract service providers

The choice impacts liability with the IRS, costs and ability to respond quickly to the marketplace.

What is at stake?

A huge back-tax bill from the IRS! Would that impact your business?

And just in case your business has been skating under the radar, there is a move afoot to tighten this area up.

It is seen as one of the 'Tax Gaps' that better IRS enforcement could help close.

What is the business case for the choice?

Employees work for you. Contracted services are provided by an outside business. Sometimes that 'outside' business is an individual who provides similar services to your business and to others.

Here are the advantages to hiring employees:

• Investment in training, skills and experience provide a longer pay-off
• The workforce is there when you need it
• You are not competing with others for the availability of contracted services when business picks up

And the advantages to using contracted services:

• You do not have to pay employee benefits and payroll taxes
• You do not have a continuing obligation so it is easier to downsize as needed
• You do not need to pay severance packages or be as concerned about employment law if you need to downsize
• You can bring in specialized knowledge to which you do not need access on a continuing basis

What does the business choice tell a lender?

If business is down but you are still holding onto your workforce, you may be taking the gamble that when the upswing comes, you will be more ready than your competition. Or, if your business is a small business, they may have figured out that employee is your brother's kid. (That could be funny...or it could be true.)

And if your business makes use of contracted services in an industry that has seen a large shake-out, the continued reliance on contracted services may cause you trouble when business rebounds and you have to compete for fewer sub-contractors.

It is a gamble either way!

A business that invests in maintaining your workforce may win out because you are recovery-ready. Or your competitor who cut back workforce may win out because they are in a better cash position to take advantage of opportunities.

Nobody knows! Like other business owners, you are making your best guess. Some will win and some will lose.

This could cost you

Make the wrong decision and you can owe back taxes, a worker's comp claim and be in a world of trouble with your lender. If they lose confidence in you, the next loan request won't go as well.