Your First Hire: Employee or Independent Contractor?

Hiring your first team member is a major milestone — and one of the first questions to answer is whether that role should be an employee or an independent contractor. This decision has long-term implications for payroll, taxes, compliance, and how your business operates day to day. Getting it right from the start sets a strong foundation for growth.

When a Contractor Makes Sense

Independent contractors are usually the best fit for situations like:

• Project-based or short-term work — for example, a designer building a website or a copywriter creating a campaign.

• Roles where the worker controls how and when the work is done — contractors often provide their own tools, methods, and schedule.

• Specialized services offered to multiple clients — such as accountants, marketers, or IT specialists.

Contractors invoice for their work, and generally you don’t withhold taxes — but it’s crucial the role truly qualifies as a contractor position. Misclassifying a worker can lead to legal and financial consequences.

When You Need an Employee

An employee is usually the right choice when:

• You set the schedule or direct how work is done — for instance, you provide detailed instructions, regular check-ins, and expect a set number of hours.

• The role is ongoing and central to your business — such as a customer service representative, operations coordinator, or sales associate.

• The worker represents your business to clients — employees are often the “face” of your company.

Employees require proper payroll setup and compliance with labor laws, but they provide consistency, loyalty, and long-term support — essential for building a strong team.

What to Have in Place Before Hiring

Before bringing someone on board, make sure you have:

• Up-to-date bookkeeping — know your cash flow and how much you can realistically spend.

• A payroll system set up correctly — even if hiring a contractor, tracking payments accurately is key.

• Worker classification reviewed — confirm whether the role qualifies as an employee or contractor.

• Basic HR processes in place — including job descriptions, contracts, and policies.

A Common First-Hire Mistake

A frequent misstep is choosing a contractor classification for convenience rather than accuracy. This can save effort in the short term but may result in back taxes, penalties, and complicated corrections later. It’s worth taking the time to classify correctly from day one.

Hiring your first team member should feel like progress, not pressure. With the right foundations, you can grow your team confidently, compliantly, and sustainably.

2026 Exempt-Salary Thresholds

Quick takeaway: The federal white-collar salary floor is unchanged for 2026, but five states—Alaska, California, Maine, New York, and Washington—have higher thresholds taking effect in 2026. Salary alone never makes a role exempt; the duties and salary-basis tests still apply.

Federal (FLSA) refresher — where things stand now

• The current federal salary minimum for the executive, administrative, and professional (EAP) exemptions remains $684/week ($35,568/yr) under the 2019 rule. A federal court vacated the 2024 DOL rule that would have raised these levels, so employers are back to the 2019 thresholds unless a state sets a higher bar. (DOL)

• Remember: employees must also meet a salary-basis test (paid a fixed, predetermined salary) and a duties test that fits EAP criteria; meeting salary alone isn’t enough. (DOL)

States with 2026 updates (effective dates & amounts)

Alaska — effective July 1, 2026

• Minimum exempt salary: $1,120.00/week ($58,240/yr)

• Alaska ties exemption pay to 2× the state minimum wage for a 40-hour week; ballot-driven minimum-wage increases trigger the salary changes. (Alaska Labor Department)

California — effective January 1, 2026

• Minimum exempt salary for most EAP roles: $1,352/week ($70,304/yr) (= 2× the statewide minimum wage of $16.90).

• CA also requires the relevant duties tests; local city wages don’t change the statewide exempt floor. (Thompson Coburn LLP)

Maine — effective January 1, 2026

• Minimum exempt salary: $871.16/week ($45,300.32/yr).

• Maine pegs the threshold to 3,000× the state minimum wage (whichever is higher—state or federal). (Maine)

New York — effective January 1, 2026

• Executive/Administrative exemptions (NY has separate salary rules for these; professional salary floor follows federal unless duties fall under state rule):

• NYC, Nassau, Suffolk, Westchester: $1,275/week (~$66,300/yr)

• Rest of state: $1,199.10/week (~$62,353.20/yr) (EBC Human Capital Management)

Washington — effective January 1, 2026

• Minimum exempt salary: 2.25× state minimum wage = $1,541.70/week (~$80,168/yr) for all employers in 2026 (WA’s multiplier continues to rise through 2028). (Washington L&I)

Don’t forget: exemption rules go beyond salary

To legally classify a role as exempt, you need all three:

1. Salary basis: A predetermined amount each pay period not reduced by variations in work quality/quantity (limited, narrowly defined deductions allowed). (DOL)

2. Salary level: Meet or exceed the higher of federal or applicable state threshold (see above). (DOL)

3. Duties test: Primary duties must fit an exemption. Common buckets:

   1. Executive: management as the primary duty, regularly directs 2+ FTEs, authority/influence over hiring/firing.

   2. Administrative: office/non-manual work related to management or general business operations, with discretion and independent judgment on significant matters.

   3. Professional: learned or creative professions requiring advanced knowledge or originality.

   4. Computer employee: special rules; in several states (e.g., CO) there are specific hourly or salary alternatives for certain computer roles.

   5. Outside sales: no salary minimum under federal law, but duties are tightly defined (primary duty is making sales away from the employer’s place of business). (DOL)

Tip: If a state’s law is more protective (higher salary, narrower duties, different multipliers), you must follow the stricter standard.

What's Next?

If you have employees who live in one of the 5 states with salary threshold changes coming, here is what we need to do:

1. Map impacted roles in AK, CA, ME, NY, and WA. Compare current salaries to the 2026 thresholds and flag any gaps by work location. (Ogletree)

2. Re-validate duties: confirm each flagged role still cleanly meets the duties test; adjust job content or reclassify if not. (DOL)

3. Choose a path per role: (a) Raise pay to the new floor, or (b) reclassify to non-exempt and budget for OT.

4. Model compression risk: raising minimums can flatten bands—re-tier ranges for leads/managers to maintain differentials. (Ogletree)

5. Tighten timekeeping & pay practices for any newly non-exempt staff (meal/rest compliance, pre-approval for OT, travel time, remote-work off-the-clock risk).

6. Communicate & train: update offer letters, handbooks, and manager talking points; schedule quick refreshers on overtime and schedules.

Dates at a glance (2026)

• Jan 1, 2026: CA ($1,352/wk), ME ($871.16/wk), NY ($1,199.10 or $1,275/wk by region), WA ($1,541.70/wk). (Thompson Coburn LLP)

• July 1, 2026: AK ($1,120/wk). (Alaska Labor Department)

• Federal: still $684/week unless changed by new rulemaking or litigation. (DOL)

Q1 Financial Health Check

We’ve gathered a few tips as we reflect on the first quarter’s financial performance and prepare for a successful Q2 and months to come.

• Review your financial statements. Evaluate your Profit & Loss statement - have your expenses been in line with expectations? From your Balance Sheet - are your liabilities growing faster than your assets?

• Review your cash inflows and outflows. Are there any cash flow patterns that might hinder your ability to operate going into Q2? Are your profit margins in line with your goals? Can you reduce costs without sacrificing quality?

• Evaluate your tax position. Have you set aside enough funds to cover taxes owed? Are there any tax deductions or credits that you can leverage?

• Revisit goals for Q2. Are your revenue goals realistic? Are there any areas where you can reinvest to drive growth - including marketing, product development or hiring key personnel?

Have any questions on these tips or want more individualized support? Our team can help offer strategic advice on your financial health, optimizing cash flow, and recommend necessary adjustments moving forward.

Tax Laws Impacting Small Businesses: 2025

Two new key tax laws that may impact your business in this 2025 tax season:

New IRS Reporting Requirements for Venmo, PayPal, and Other Payment Platforms

The IRS is now requiring payment processors like Venmo, PayPal, and Cash App to report payments for goods or services that total over $600 annually. This change primarily affects small businesses that use these platforms for customer transactions.

Action Item: If you use payment processors for business transactions, keep accurate records to report income correctly to avoid any compliance issues. 

Changes to Qualified Business Income (QBI) Deduction

Small business owners who operate pass-through entities can benefit from the Qualified Business Income Deduction (QBI), which allows them to deduct up to 20% of their qualified business income. In 2025, the IRS has refined the rules on which businesses qualify, with an increased focus on income limits and eligibility criteria.

Action Item: If your business has substantial income, consult with your tax preparer to ensure you are maximizing the QBI deduction and understanding the limits that apply to your specific situation.

Michigan Clients - Earned Sick Time Act (ESTA)

NEW! Important information for Michigan Clients - Earned Sick Time Act (ESTA).

We want to keep you informed about an important change in Michigan’s labor laws that will take effect on February 21, 2025. The Earned Sick Time Act (ESTA) requires employers to provide paid sick leave to employees. This law is a significant step in promoting workplace health and well-being, and it will impact all employers operating in the state of Michigan.

Key provisions of ESTA:

• Accrual of Paid Sick Leave: Employees will begin earning paid sick leave at the rate of 1 hour for every 30 hours worked.

• Usage of Sick Time: Employees can use this paid sick leave for their own illness or injury, or to care for a family member.

• Employee Eligibility: ESTA applies to all employees working in Michigan, with certain exceptions for small businesses with fewer than 50 employees.

What this means for employers:

• Compliance: Employers must update their policies to ensure they are in compliance with ESTA before it takes effect.

• Tracking Hours: Employers will need to track sick leave accruals and provide a process for employees to request time off.

• Notification: It’s important that employees are informed of their rights under the new law.

We encourage you to review your current sick leave policies to ensure they align with ESTA requirements before the law goes into effect.

If you have any additional questions or concerns, feel free to reach out to us directly as we’re here to help navigate any specific changes.