Hiring your first employee can be a daunting but necessary step for growth. You need to trust that someone else will provide the same level of care you’ve always given your clients, and this perceived loss of control often leads owners to impose strict rules on their new staff. However, the degree of control you can exert depends on how you define the relationship.
If you intend to establish standardized procedures that all workers must follow, you’ll likely create a detailed manual outlining your expectations. You might consider having employees sign non-compete agreements to ensure loyalty and expect them to work consistently to provide clients with familiar walkers or sitters.
Alternatively, if you’re comfortable with staff operating independently with minimal oversight, you could function more like an agency, connecting independent dog walkers and pet sitters (who operate as their own businesses) with clients for short-term contracts. Each worker would set their own rules for walks and pet sits, and be responsible for their own equipment and self-employment taxes.
You’ll also need to consider whether your pet sitting software can handle compensation payments, time tracking, and shift management for both employees and independent contractors.
These two approaches illustrate the key differences between hiring employees and independent contractors (ICs), as defined by the Internal Revenue Service (IRS). The distinctions are significant, so it’s puzzling why many dog walking and pet sitting companies operate with an employer-employee structure while declaring an independent contractor relationship to the government.
Defining Independent Contractors and Employees
Many first-time business owners are drawn to the idea of using independent contractors because it seems easier and cheaper than hiring employees. It’s true that employees require the company to handle withholding, depositing, reporting, and paying employment taxes, unemployment tax on wages, and providing worker’s compensation, along with benefits like sick leave and holiday pay.
In online pet sitting forums, hiring ICs is a common topic, and likely, other companies in your area operate this way. However, before blindly following this trend, you must consider the legal implications.
To determine whether a worker is an independent contractor or an employee, the government considers three main categories:
- Behavioral Control: This refers to the business’s right to direct and control the worker. An employee is subject to instructions on when and where to work, what tools to use, what tasks to perform, and in what order. Evaluation systems or company-provided training also suggest an employer-employee relationship.
- Financial Control: This refers to the business’s control over the worker’s economic aspects. An independent contractor typically invests in their own equipment and can advertise and seek additional work, even with competitors.
- Relationship: While contracts defining workers as independent contractors exist, the IRS focuses on how the parties actually work together. Expecting a worker to stay beyond a specific reservation indicates an employer-employee relationship. If the worker performs duties that are the company’s main source of income, they are likely an employee.
When examining these differences, it’s clear how pet sitting and dog walking companies should classify their workers. Often, they operate with an employer-employee structure but classify workers as ICs. Some owners are unaware of the differences, while others knowingly misclassify workers, believing they are too small for IRS scrutiny, or are willing to take the risk.
Consequences of Misclassifying an Employee as an Independent Contractor
If you think your company is too small for the IRS to notice, reconsider. An IC who files for unemployment or reports misclassification can trigger an IRS audit. If you’re found to have misclassified workers, you’ll be responsible for revising your previous three tax returns and paying three years of back taxes on all misclassified workers.