Category: Finance

If you’re unsure whether to hire an employee or have a contractor, this article will guide you on differentiating both. The article will differentiate both in terms of the scope of work, dependency factors, legal forms required, and financial investment. Both employees and contractors have the ability to perform necessary tasks, but contractors are more independent in terms of material, equipment, and time.  Dependency Factor Employers have minimal control of how contractors should perform the job, as long as the result provided is what was requested. On the contrary, employers have full control of employees from processes to results. Independent contractors most often own the equipment, materials, and supplies needed to perform a particular task. Some examples of equipment and material could be computers, forms, construction tools and materials, and sometimes an office space. Contrary to contractors, employees have most if not all equipment and materials provided to them by the employer. A conceptual way to understand is that contractors can fully complete the job independently, while employees most frequently will be unable to complete the task without the supervision of their employer.  The IRS defines characteristics to differentiate contractors from employees. Click this link for employees, and this link for contractors. Forms Requested  In terms of compliance, the employee and contractor have different forms to file in order to comply with the state government.  It is critical that companies request a W-9 filed form from any contractor before proceeding with any type of engagement and payment. The IRS provides the instructions here to guide contractors filing the form.  On the other hand, employees are requested to fill out the W-4 for federal withholding and I-9 for immigration eligibility. Budget Allocation Employees are consistently paid depending on payroll pay frequency, but contractors are usually paid on a project basis.  Hiring employees requires a consistent investment due to the tax compliance and the quarterly payroll returns that need to be filed with the state government. Businesses should know that they will need to pay additional taxes when hiring individuals on payroll. Alternatively, there is no tax withheld from businesses when they make a payment to contractors, which financially costs them less in the short-term.  There is no better or worse in deciding whether a business should hire employees or sign contractors. Businesses should decide based on the goals that they are trying to achieve and the frequency of their projects. Some businesses have intense projects based on seasons, but others will have the same projects permanently. Eneya Accounting is available to assist your business with payroll recording and contractor forms for any given season. Contact us at 949-529-0740, or schedule your consultation via this link.

Most business owners struggle figuring out why their financials (income statement) show that their company is profitable, but the business has zero to almost no cash on hand. This leads many business owners to ask, what is cash flow versus net income? Before diving into details, it is more practical to start defining and distinguishing profit from cash. Profit is defined as the offsetting results of what you have earned against how much it costs you to generate that income. The costs or expenses should solely be related to the business activities. Cash or cash equivalents are the liquidity reserve of what a business has earned and not used at the same time. The bank balance gives a snapshot of how much is on hand, but it is important to consider the cutoff and scheduled automatic payments as factors that impact the cash balance in the bank accounts.   Now, let us dive into the income statement details. The costs included in the income statement (earning statement) are administrative and operating, which means solely related to daily, weekly, and monthly operations of the business, in addition to loan interest payments. The remaining business-related expenses that have a significant balance, depending on the threshold implemented by the business, should be categorized as assets or business liability payments, which are not included in the income statement, but are categorized in the balance sheet. For non-business expenses, they are usually categorized in the equity accounts of the business, which is a part of the balance sheet. Excluding personal-related expenses, asset purchases and liability repayments reduce the operating expenses, which also increase the net income of the business.  However, the net income balance is not the cash that the business has on hand. The net income reflects the business performance for a specific period. The most accurate snapshot of cash on hand is the bank balance. However, businesses should take into consideration the cutoff time for uncleared checks and the automatic scheduled payments that will credit the bank accounts. As business owners, it is critical to know the distinction between cash on hand and the net income to avoid confusion and to facilitate understanding of their business process.  Do you want to learn more? Eneya Accounting provides virtual training for small and medium business owners for a better understanding of their financials.