Employee vs Independent Contractor: What You Need to Consider

Especially in this down economy, many business owners are utilizing the services of independent contractors and freelance workers over hiring part-time or full-time employees. As an entrepreneur, knowing when to hire an independent contractor or bring in a new employee requires much consideration.

First, let’s differentiate the two. If you go by the IRS definitions, an individual whose work is controlled by you—if you direct them and you dictate what is to be done and how it is to be done, then you have an employer/employee relationship. If on the other hand, you have control or input on just the result of the work done but not the methods and means of achieving that result—then, they’re an independent contractor. As a business owner, you need to be careful in hiring and paying independent contractors if they should be made an employee. Remember, the tax collector never sleeps. The IRS provides criteria and classifications for workers if you’re still concerned about the difference.

Let’s now look at some of the pros and cons of hiring an employee versus using a contractor or freelancer. Obviously, you do not need to provide health insurance and other benefits to a contractor, so that is a plus. If your workload and/or work schedule changes frequently and so your needs fluctuate, then independent contractors are ideal because you can use them only when needed. If you hire someone to do the job, you find yourself trying to fill their workday on slow days or weeks.

You also have reduced overhead costs when using independent contractors. So it seems like a great solution. But now you have to consider some other factors: like loyalty. Someone who is an employee of your company may be more likely to care about the end result and long-term success of their tasks and projects than a freelance worker. An employee may be more likely to point out flaws or to try to excel rather than just complete the task. Remember—independent contractors who are being paid by the hour or by the project have a goal of getting your work done as quickly as possible for the money amount that they quoted you. The less time they spend to achieve the result that you asked for, the better it is for them.

Another positive of hiring an employee is that you potentially have someone that learns your company really well and stays with you for a long time, becoming an invaluable resource. Especially if this person is in a management role, this allows for continuity and stability. If you have staff members who are frequently working with different contractors, there can be inefficiencies and inconsistencies. One of the downsides of more employees, along with extra overhead costs, is the fact that the more people you have working for you, the more you get caught up in management and human resources issues, thus having less time to practice your trade and work your business.

As for independent contractors, there are some cons there too. Their rates can fluctuate, as can their availability. If they get a higher paying project or client, your projects could be bumped—given a lower priority. If they realize your need for them is great yet they are busy contractors, they can ask you for a higher rate and you will most likely pay it.

Remember, unethical business owners may use the independent contractor label to avoid paying payroll taxes, workers’ compensation insurance, benefits, overtime, or even the minimum wage. So it’s important that you do not abuse the right to hire independent contractors. There is much information online about when an employee should be classified as such. You have to examine things like the types of tasks that they are performing; the length of time for which these tasks are performed; the permanence of the work/relationship; the method of payment; the location where the work is being done; and other factors. It is wise to do your homework and make sure that your classifying employees and contractors properly. You don’t want to find yourself in a tax tangle with the Internal Revenue Service. Be informed and you will make the right decision.

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