During this last recession, many laid off architects hung out their shingle and started their own firms. Now that the economy is recovering, these same architects want to know – How do I get all the work accomplished? Should I hire an employee?
It is no wonder that small firms consider all options before adding employees, since the Small Business Administration (SBA) reports that the impact of regulatory costs on firms with less than 20 employees is 36% more than larger firms. Three options exist for small firms to share their work load: 1. Team with other sole practitioners and consultants; 2. Hire employees and manage the regulatory requirements in-house; and 3. Outsource human resource and payroll tasks to a Professional Employer Organization (PEO).
The approach for many sole practitioners’ (24% of AIA member firms) is to look big while staying small. They assemble teams for each project which might include draftsmen, engineers, interior designers, code reviewers, and other sole practitioner architects. The critical issue in this model is to make sure that independent contractors are in fact independent and not common-law employees. The Internal Revenue Service (IRS) defines an individual as an independent contractor if the “payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” If an employee is classified as an independent contractor, the business may be held liable for employment taxes for that worker.
Independent Contractor or Common-Law Employee
With most consultants there is a clear division of work and no confusion about being an independent contractor. The slippery slope to common-law employees can start with draftsmen or intern architects. The IRS defines an employee by the evidence of the degree of control and independence which includes the following:
Behavioral Control:
• Who determines when and where to work?
• Who provides computers, desks, and computer programs for doing the work?
• Who determines how to prepare the drawings and in what sequence to do the work?
• Who trains the worker on how to do the job?
Financial Control:
• Is the worker free to seek other clients?
• Is the worker able to make a profit or loss?
• How is the worker paid? If they are paid a regular wage for a period of time, the IRS assumes the worker is an employee. Independent contractors are typically paid a fee for the job.
• The permanency of the relationship is the important issue here. The IRS looks to see if the worker is hired for one project or indefinitely and
• If the worker provides a key service of the business.
Hiring Employees
What are the regulatory requirements when a firm is ready to hire employees? The United States Department of Labor (DOL) has a great and user-friendly primer at www.dol.gov on complying with the law. It is an easy questionnaire that asks a few questions about the nature of your business, number of employees, if you are hiring foreigners and or disabled workers, if you plan on having a retirement plan and if you will provide health insurance. After answering the questions, the applicable laws are outlined such as The Consumer Credit Protection Act, Employee Retirement Income Security Act, Fair Labor Standards, Occupational Safety and Health Act, and the Uniformed Services Employment and Reemployment Rights Act.
The United States Small Business Administration at http://www.sba.gov has the Federal Employment Law Forms, such as the I-9 Employment Eligibility Verification Form which is required by the U.S. Citizen and Immigration Services.
The Internal Revenue Service requires an Employee Identification Number (EIN) which you can apply for on line http://www.irs.gov. The IRS web site also has information on withholding and depositing Federal Income Tax and Social Security and Medicare tax from employee wages; as well as Federal Unemployment Tax.
Finally, the firm needs to comply with state and local laws for State Income Tax withholding and State Unemployment Tax.
Professional Employer Organizations
If your head is spinning with the regulations and paperwork in hiring an employee, another option is to work with a Professional Employer Organization (PEO) where the PEO is a co-employer with the firm. The PEO hires the firms employees and becomes the employer of record for the firm. In essence, when a small firm works with a PEO it has the human resource department of a large firm; freeing up the small firm owner’s time to concentrate on architecture.
The PEO is responsible for all the state and federal regulatory compliance and filings such as unemployment insurance, new hire reporting, payroll taxes, worker’s compensation, and year end W-2 preparation. PEOs also offer benefit packages and administration such as insurance, retirement plans, 529 college saving plans, and COBRA (Consolidated Omnibus Budget Reconciliation Act) administration. By joining a larger employee pool, the small firm accrues savings on insurance and other benefits. PEOs also advise small firms on employment risk management issues.
Typically, PEOs charge a service fee of three to five percent of the compensation package for each employee including the principals. The best starting point to find a PEO is their trade association, The National Association of Professional Employer Organizations (NAPEO). http://www.napeo.org/
Whichever method you use it is always helpful to get expert advice. SCORE http://www.score.org is a non-profit association that provides free and confidential advice to small business. There are 354 local offices across the country.