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Employee Classifications – Hiring Strategy Options
Business is booming and you’ve realized you need some extra help to keep your business growing. You can’t do everything anymore. The big question you need to answer first is not “Who should I hire?” but “What should I hire?” Should I hire employees (full-time or part-time), temporary workers, independent contractors, or should I outsource the functions? Once you determine the “What”, you can better answer the all-important question – Who should I hire?
When it comes to hiring additional help for your business, you have several different options. When looking at different options, you should also be aware of the impact on your bottom line. What type of worker (employee classification) you hire is important. You may wonder how employee classification affects your business. Employee classifications affect your company’s bottom line – classification affects expected wages, benefits and taxes. It can also be significant if you accidentally misclassify an employee: your business could be subject to fines, penalties and back taxes.
Employees: Employers usually have the most control over employees: you determine how many hours the employee works, what they do, and how they do it. As a rule, workers work for the employer, the employer provides tools, materials and other equipment; they also provide training and supervision.
Employees may be employed full-time or part-time; they can be salaried (exempt from the Fair Labor Standards Act) or nonexempt (hourly and eligible for overtime pay).
Employers are responsible for withholding federal and state taxes, Social Security and Medicare taxes from employees’ wages and applicable Social Security and Medicare taxes. Employees are entitled to certain mandatory benefits, such as social security and health care, workers’ compensation insurance, and unemployment insurance. As an employer, you have the option of providing other benefits such as health insurance, vacation and tuition reimbursement. Providing other benefits makes your company a more desirable place to work, but you need to be careful and evaluate the return on your investment and the impact on your cash flow.
Temporary or contract workers: These are workers who are hired on an as-needed basis. They might be hired to complete a project or cover for someone on vacation. Employers can hire temporary workers directly, but most opt for the services of an external staffing agency. Recruitment agencies often have a selection of candidates immediately available. In exchange for payment, the staffing agency retains responsibility for compensation, payroll taxes and benefits for the contingent worker. The employer has the option to add qualified staff with minimal exposure to tax liabilities. This flexibility is related to the add-on. The hourly rates of workers hired through an agency are usually 40% higher than direct hire, but you as the employer are not responsible for withholding tax and other benefits. For short-term needs, this may be the most economical solution.
Agency workers: Agency workers are different from temporary or contract workers; they are usually hired for a longer period of time. Hired workers are obtained through a PEO – a professional employment organization. The PEO is responsible for financial and administrative responsibilities for employee wages and benefits; the employer is responsible for determining the employee’s hours, what he does and how he works. Hired workers work for the employer, the employer provides tools, materials and other equipment; they also provide training and supervision. Because PEOs typically manage benefits and payroll for a large number of employees, they can offer comparable salary and benefit packages to employees and charge the client less than they would normally pay. There are questions regarding “contributor” status with PEOs.
Be sure to check with your state regarding unemployment laws; in Pennsylvania, hired workers paid after July 1, 2005 are identified as employees of the customer, and the customer company is responsible for reporting the hired workers’ wages on its UC tax account (see Section 4(j) 2.1 of the PA UC Act ). Before July 1, 2005, the state will use instructions and a control test to determine the employer.
Independent Contractor: Independent contractors are typically professionals who perform services for a business on a project basis and then bill the business for those services and related costs. The independent contractor controls how and where the work is done, provides its own tools and equipment, and is only responsible for the results. The employer has no tax liability for the independent contractor; they are only responsible for paying the bill and reporting the payments on Form 1099. When hiring an independent contractor, it is best to outline expectations in the form of an independent contractor agreement that includes the scope of work. There are many versions of an independent contractor agreement available on the Internet. It’s always a good idea to have your attorney review it, as laws vary from state to state.
The IRS has developed a subjective checklist of 20 factors to determine whether there is sufficient control to establish an employee-employer relationship. If the arrangement fails IRS review, the employer may be liable for withholding taxes, penalties of up to 100% of back taxes, and other statutory payments and penalties on behalf of the now-appointed employee. If you have questions about whether an individual is an employee or an independent contractor, it’s best to err on the side of the employee. It could be cheaper in the long run.
Outsourcing: Companies can outsource entire departments or functions, such as shipping, human resources, accounting, customer service, benefits management, or computer networking, to a company that specializes in that area. This can be cost effective; the company does not need to invest in new equipment, facilities or additional employees. The external company can operate in parallel within the company or from its own plant. Standards and expectations are developed and the work is done by an outside company for a flat fee. By outsourcing side functions, a company can focus on its core business.
An important factor to consider – you are not limited to one type of worker. By determining your needs, you can develop an overall recruitment strategy consisting of a mix of staffing options. While developing your business plan, you reviewed your potential staffing needs against the needs of the business. If you did not create a business plan when you started your company, now is the time to prepare one. While you may not be looking for outside money, creating a business plan for the next few years, budgeting, and revenue projections will help you determine your HR strategy. If all of this is making your head spin, your first hiring decision may be to retain a professional, independent contractor to help you work through your business plan and recruiting needs. You can save a lot of time and resources by hiring a consultant to help you with your business plan and define job functions and tasks, skill and qualification requirements.
Once you are satisfied with your business direction and budget, ask yourself the following questions:
1. What specifically do I need this person or persons to do? Develop a job description for each need that includes the following:
a. General Responsibility – A short phrase that covers the general responsibilities of the position
b. Specific areas of responsibility
c. List of required skills
d. Experience Requirements
2. How much time will this person have to spend on the required tasks?
3. Is this a permanent position or do I need this person for a certain period of time or for a one-off project?
4. What equipment do I need to buy or rent for this person to board?
5. Do I need to get workers compensation insurance, federal tax number, new facilities?
By answering the questions above and reviewing the various options available to you, you’re well on your way to developing a recruiting strategy and deciding who to hire! The next step in your recruitment strategy is to identify your recruitment sources. The following article will discuss traditional and non-traditional sources for workers. As always, it is wise to consult with your attorney or CPA regarding specific legal and tax issues affecting your new hires.
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