Independent contractors are becoming more and more popular among companies because they serve an important function. Just as you might not need a full-time doctor or lawyer on staff, small businesses are starting to use independent contractors for marketing, design, and other roles that used to be occupied by a full-time person.

Our data at SurePayroll from surveying small business owners has shown a gradual increase in the percentage of 1099 workers since 2004, rising from nearly 2.9 percent to 6.7 percent.

Let’s look at how an independent contractor might affect your small business payroll:

• Taxes. Tax withholding is not required for independent contractors. The company does not have to pay Social Security or Medicare tax or federal and state unemployment insurance contributions.

• Work schedule. Independent contractors set their own hours and sequence of work. They can work for multiple employers, and their services are available to the public. They tend to work job-by-job rather than on a continuing basis with a single employer.

• Budget. Employers can often save money using independent contractors, not only because of the tax situation but also because they’re not providing supplies, work space, or equipment. The independent contractor takes on the risk of profit or loss. Employers generally agree on a price or an hourly rate rather than a continuing salary with benefits and reimbursements for expenses.

There are two ways an employer can go about determining a worker’s status. One is the Common Law Test, which asks how independent the employee is based on the points discussed above. However, there are exceptions, and employers can also use the Reasonable Basis Test, which allows them to designate someone as an independent contractor for tax purposes if there is a reasonable basis to do so.

A worker or employer may request the IRS’s determination of the worker’s status by filing Form SS-8.

The next question becomes how you decide what kind of worker you want to hire. Before you make the decision, consider a few more factors:

• Need. Are you working on some type of seasonal campaign or a one-off project for which your current staff doesn’t have time? If so, consider an independent contractor. If you’re generally understaffed, however, and you need someone you can count on for more than just a few months or a year, you may want to consider adding a regular employee.

• Cost. As long as the person meets the criteria for an independent contractor, hiring this type of employee can mean savings over the long term, though you might pay more short term on an hourly basis.

• Dependability. This is an issue with anyone you hire, but with an independent contractor the required supervision should be much less. Do your research when hiring so you can be confident you’re getting someone you can trust to work on his or her own.

Finally, remember that even though you are not required to withhold taxes on an independent contractor, you still must fill out the Form 1099-MISC. If you have questions on this, be sure to talk with an accountant or your payroll services provider.

Michael Alter is president and CEO of SurePayroll, a wholly owned subsidiary of Paychex. SurePayroll provides payroll services for small businesses.

Setting up payroll for your small business is at once a simple and increasingly complex process. To gain a basic understanding, let’s start with the simple part.

If you’re starting up a business, you have to pay your employees, and obviously they will expect their paychecks to be accurate and on time. You will have to choose a payroll schedule that works best for your company.

Once you’ve determined how much and how often you will compensate your employees, you’ll need to withhold a portion of their earnings while also paying for things like health insurance, 401(k) contributions, and workers’ compensation. The government, of course, takes its share in what’s often referred to as the payroll tax for Social Security, Medicare, and federal, state, and local taxes. Employees generally get to keep what’s left over.

As an employer, there’s a laundry list of things for which you’re responsible when it comes to payroll: distributing paychecks and pay stubs; reconciling deductions; depositing and reporting taxes; and inputting new hire information, among other things.

There are many aspects of the process that you should understand when managing a payroll. Here are four of the key aspects:

1. Tax laws. Many federal, state, and local laws and regulations impact the way companies can pay their workers. In today’s increasingly complex tax environment, it’s important to keep up with changing laws and regulations so as not to risk facing IRS and applicable state revenue service penalties.

2. Communication. Employees should be able to understand their paychecks. The more clear and concise you can be about payroll information, the better. Common concerns include how federal income taxes are calculated (factors include marital status, allowances, and how often and how much you are paid); what abbreviations like FICA (Social Security) and MEDFICA (Medicare) mean; why take-home pay is lower (expiration of payroll tax holiday); and how deductions affect take-home pay (depends if it is pre- or post-tax).

3. Technology. There are a variety of providers and technologies available to help with payroll and human resources responsibilities. You should consider how comfortable you are with the payroll process and decide what level of payroll technology help you may need.

4. Accuracy. The accuracy of employees’ pay can’t be emphasized enough. It goes without saying that if you don’t pay your employees accurately, they’re not going to be very happy with you—but there is more to payroll accuracy than that. You must be accurate in tax filing, payroll reports, and all other calculations and deductions. This is another area where technology can come in handy.

Many business owners are tempted to handle payroll on their own. Doing it yourself may seem like a good way to save money, but you should be very aware of what mistakes may cost you in penalties and fines. According to the U.S. Chamber of Commerce, one in three businesses pay an IRS penalty every year. It may be worth your while to consider hiring a payroll services company or Certified Public Accountant (CPA) to help you through this complex task.

Michael Alter is president and CEO of SurePayroll, a wholly owned subsidiary of Paychex. SurePayroll provides payroll services for small businesses.

Mistakes in running your payroll could cost you time and money, and they could potentially cause trouble with the IRS—the last thing you want. There are common mistakes that should be avoided.

Let’s go over seven of the most important payroll areas of which you need to be aware:

1. Accuracy. The first mistake small business owners make with payroll is perhaps the easiest one to avoid. When running a payroll, you need to make sure to verify dates, names, and hours. Going back to correct these kinds of mistakes can be time-consuming and frustrating. If you’re using a payroll service, make sure it allows you to preview your payroll before you give your approval.
2. Schedule. Another easy way to avoid a costly payroll mistake is by keeping a close eye on bank holidays. You may have to process payroll a day early to avoid a delay in getting your employees paid.
3. Payroll tax calculations. This is where it starts getting complicated. If you’re doing payroll yourself, you’ll need to keep up with tax laws and regulations and cross-check tax deductions with the IRS tax tables to ensure that you’re paying the proper federal, state, and local payroll taxes. If you’re using a payroll service or considering one, consider one that will do all the payroll tax work for you, including deductions, calculations, filing, and payment on your behalf.
4. Check date vs. pay period. This can be a tricky distinction, but it’s important to note for tax purposes that the check date, not the pay period, determines when the payroll is reported. When doing tax filings, this can create confusion if you’re not careful to differentiate the two.
5. Pre-tax vs. post-tax. 401(k) contributions are probably among the most common pre-tax deductions from gross wages. If your employees have other accounts like a Roth IRA, you need to understand the difference in how taxes are paid so as not to raise red flags with the IRS. Consult with the IRS, your accountant, or your payroll provider for help.
6. Terminated employees. Employers sometimes forget when an employee worked for them. However, you still need to complete a W-2 for employees that were terminated during the year.
7. Tax correspondence. If you’re working with a payroll provider, you must remember to send it any correspondence you receive from tax agencies. If you’re doing payroll yourself, take special care to read what the tax agencies send you and make any changes necessary.

It’s a good idea to consider how comfortable you are with running payroll for your business. As your business grows, it might be something that’s not worth the time, effort, and potential for costly mistakes. In the meantime, keep these seven tips in mind so you can get off to a good start.

Michael Alter is president and CEO of SurePayroll, a wholly owned subsidiary of Paychex. SurePayroll provides payroll services for small businesses.