Freelancers vs. FTEs — Which Offers the Best Tax Advantages?

Running a business is a complex and time-consuming affair and there can be many unexpected expenses and complications. One area where business owners can save money by making smart decisions is with taxes. For example, using freelancers instead of full-time employees (FTEs) can save money and reduce your administrative burden. To help you get the full picture, Leah Manya shares the following tips.

Why Hire Freelancers Instead of FTEs?

According to statistics from Morgan Stanley, freelance workers make up around one-third of the US workforce. ValueWalk speculates that, by 2027, freelancers could outnumber employees. But what is it that makes companies so eager to choose freelancers over employees? There are many potential benefits to hiring freelancers instead of FTEs.

• Freelancers handle their own income taxes, meaning payroll is easier to manage
• If you’re not classed as an employer, your business’ tax forms are simpler
• You won’t be required to pay for unemployment taxes or workers’ compensation insurance
• There’s no need to make FICA tax contributions for a freelancer
• Hiring freelancers offers increased flexibility for short-term projects
• The rights of independent contractors are different from those of employees

Choosing freelancers instead of having full-time employees means you don’t have to worry about the rights, obligations, and taxation requirements that employers have to pay attention to. Many workers enjoy being freelance because it gives them flexibility on their side, too.

If you want to retain freelance workers long-term, you’ll need to offer them a competitive hourly rate and give them other benefits to remain loyal to you, especially considering the contractor will need to take care of their own taxes and medical insurance, etc. If you’re willing to do this, however, you can enjoy the perks of not being an employer while still having a dedicated and engaged team.

Other Ways to Reduce Your Tax Burden

The way you run your business can have a significant impact on its cash flow, and on its tax treatment, too. If you form an LLC for your business, for example, then you can take advantage of pass-through taxation. This means you’ll pay taxes at individual income tax rates rather than being subject to corporate federal income taxes. 

Before you make any decisions about the legal structure of your company and register an LLC, consult an expert. LLC formation rules and requirements differ by state, so knowing the rules in your state is essential. You can avoid lawyer fees and costly mistakes by using a business formation service.

Find a Reliable Accountant

If you’re unsure whether a person you work with should be classified as an independent contractor or an employee, or you’re not sure what your tax and payroll obligations are, find a skilled and experienced accountant to advise you. An accountant can help you understand state and federal tax rules and will ensure you’re meeting all of your legal obligations.

Freelancing Can Be a Smart Choice

Choosing a freelancer over an FTE and using an LLC for your business can simplify payroll and taxation, and have other benefits, too. These benefits can amount to significant cost (and paperwork) savings in the long term.  This article is credited to  thebizbuzz.net.

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