What to Consider When Hiring Temporary Employees This Holiday Season

Oct 1

While the holidays might look a little different in 2020, companies across America are excitedly waiting for Black Friday and Cyber Monday. Business owners are busy preparing, getting inventory on the shelves, setting holiday schedules, and launching marketing campaigns to get new customers in the door. Companies are also working to ensure they are properly staffed to get them through their busiest season.

Companies have many options to get through the holiday season, offering regular employees additional hours or looking towards seasonal help to help them get through. If a company chooses to bring in temporary employees, there are some considerations, both legal and tax, that they must consider.

Is a Part-Time Employee a Contractor?

When it comes to temporary help, many people use the word contractor, since contractors are associated with short-term, temporary help. But if you're hiring a part-time person to work in your kiosk or warehouse for a few months, that doesn't necessarily make them a contract.

A few essential qualities define a contractor and differentiate them from employees (part-time or full-time). Here’s where they differ:

As shown in the chart above, part-time retail employees wouldn't be classified as contractors, since they need to be on location during regular business (retail) hours, follow specific customer service policies, and you will provide training and equipment.

While a contractor is better suited for graphic design or social media, things can do things in their own time at their own pace.

If you decide to hire temporary, part-time help, you will treat them as long-term employees by adding them to your payroll and filing taxes on their behalf. Contract employees will handle their taxes in separate filings with the IRS.

Collect The Proper employment Forms

If you already have employees, you are probably familiar with the W-4 Form, which gathers all the payroll information you need. However, if you don't have employees and are only looking to hire contractors, you will want to familiarize yourself with the W-9 Form.

Contractors are responsible for paying their taxes, so you don’t need to worry about withholding taxes from their compensation. But you will have some paperwork to do. The W-9 Form gathers contractor information to make it easier to file taxes and report their work to the IRS.

You will also be required to submit an I-9 Form. These forms have to be physically inspected as digital photo copies will not work. Anyone may verify an I-9 Form as long as it’s not to hire themself.

The holiday season is busy, especially in retail and eCommerce. While it might be tempting to skip the paperwork, resist the temptation, and make it a practice to collect all employment forms from every person you work with.

W-4 Form Example

W-9 Form Example

Send 1099s to Contractors

Before you know it, the new year will be here, and while you've withheld wages for tax payments for your regular employees, you'll need to do some work in January to help your contractors file their taxes in April.

A general rule to follow is you'll send 1099 Forms to all contractors that earned $600 or more during the previous calendar year. So, if you paid a contractor three payments of $200 in one year ($600 total), you'll need to send them a 1099 Form the following January.

Everything on the 1099 Form will come directly from the W-9 collected when they first started working for you. So, if you're in the practice of collecting those forms, January will be much easier.

Find the Right Amount of Help

Let's face it; the paperwork required to hire part-time help isn't the most challenging part of the process. For most, the difficulty lies in finding the right amount of support. In other words, knowing how much help you need versus how much help you can afford.

There are many ways to calculate labor costs, and it's easy to get lost down a rabbit hole. So we'll keep it simple and focus on the labor-to-revenue ratio.

“Labor-to-Revenue Ratio = Labor Costs / Revenue”

The labor-to-revenue ratio is how much you spend on labor versus how much you bring in through revenue. Review your financial statements from the past few months to help get a baseline for your labor-to-revenue ratio.

Next, review your projections for this year's holiday season. Based on your expected revenue, you can use the labor-to-revenue ration to assist in calculating the amount of labor you can afford.

For example, if your labor-to-revenue hovers around .25 (25% of your revenue is spent on labor) and your predicting holiday revenues around $300,000, then here is how you can find your budget for work.

X (Labor Costs) / $300,000 (Budgeted Revenue) = 0.25 (Your Typical Labor-to-Revenue Ratio)

X (Labor Costs) = 0.25 * $300,000

X (Labor Costs) = $75,000

To sum it up, you've got about $75,000 to spend on labor before you stray away from your standard labor-to-revenue ratio.

There are countless ways to analyze labor costs. However, if you've been operating on instinct until now, you might want to consider adopting the labor-to-revenue ratio as a starting point for labor planning.

Basis 365