Question 1

What are the hidden costs of hiring an employee?

Accepted Answer

Beyond salary, employers pay 7.65% in FICA taxes (Social Security + Medicare), FUTA/SUTA unemployment taxes, plus benefits like health insurance, retirement matching, PTO, workers' comp, and equipment. Total overhead typically adds 25-40% on top of base salary.

Question 2

When is a contractor more cost-effective?

Accepted Answer

Contractors are usually cheaper for part-time work (under 1,500 hours/year), specialized short-term projects, seasonal work, or when you don't need to provide benefits. The break-even point depends on the contractor's hourly rate vs. the employee's fully-loaded cost.

Question 3

What are the IRS rules for worker classification?

Accepted Answer

The IRS uses three categories: behavioral control (do you direct how work is done?), financial control (do you control business aspects?), and relationship type (is there a written contract, benefits?). Misclassifying employees as contractors can result in back taxes, penalties, and legal liability.

Question 4

What is the break-even contractor rate?

Accepted Answer

The break-even rate is the hourly rate at which a contractor costs the same as a full-time employee. Calculate it by dividing the employee's total annual cost by the contractor's expected annual hours.

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