Should I Hire Employees or Contractors & How Do I Tell the Difference?

Should I Hire Employees or Contractors & How Do I Tell the Difference?

When you need help running your business, a common question is if you should hire employees or independent contractors. What are the main differences? And what are the pros and cons?

The main difference between employees and independent contractors is that employees provide ongoing work and independent contractors are hired for a specific project or set of projects independently.

The IRS uses three characteristics to define the relationship between a business and its workers:

  1. Behavioral Control – If a business directs/controls how the work is done.
  2. Financial Control – If a business directs/controls the financial and business aspects of the job.
  3. Type of Relationship – How the workers and owner perceive the relationship.

If a business owner has the right to control/direct how a job is completed, they’re most likely working with employees, whereas if the owner has the right to control/direct the result of the work done (as opposed to the means/methods taken), they’re most likely working with independent contractors.

Pros/Cons of Employees
The benefits to hiring employees include:

  • Loyalty. In addition to being more productive, a worker that feels a sense of loyalty and vested interest in the business is more likely to take on additional roles and help the company grow. Plus, because an employee works exclusively with the business, owners don’t need to worry about proprietary information a competitor may learn from hiring the same independent contractor.
  • More Productive Workflow. An employee can take on a variety of tasks much more easily than an independent contractor. With an employee, owners don’t need to worry about another company’s schedule, coordinating multiple projects with various independent contractors, etc.
  • Additional Roles. Employees can perform multiple roles much more easily than independent contractors. In addition to the company having a more diverse workforce, this gives the business owner the flexibility to assign tasks depending on workload as opposed to negotiated agreements.

The disadvantages include:

  • Fiscal Responsibility. Employees are paid a salary separate from specific projects, so the burden of making payroll falls to the business owner, regardless of incoming cash flow.
  • Overhead. In addition to providing space for employees to work, there are additional tax implications for this type of worker.
  • Managerial Role. Someone needs to manage employees, which is a task that often falls to the business owner – especially in small companies. The larger the staff, the more time spent working with employees and the less time spent practicing your craft.

Pros/Cons of Independent Contractors
The benefits to hiring independent contractors include:

  • Overhead. Working with independent contractors means the business owner can greatly reduce costs when it comes to taxes, expenses, payroll, benefits, health benefits etc.
  • Flexibility. Because independent contractors are hired for a specific project or series of projects, the business owner can easily adjust the number of workers without needing to worry about layoffs or paying for unemployment.
  • Training. Independent contractors often come fully trained and specialized, so the owner or manager doesn’t need to spend valuable time and resources teaching them how to do their job.

The disadvantages include:

  • Changing Rates. Because independent contractors are hired for a specific project or set of projects, they may raise their rates based on the market or as they’re given additional work.
  • No Control. Independent contractors choose who they work for and when they work, so if they have other work taking up their time they may pass on a couple of projects, leaving the business owner looking for another contractor.
  • Misclassification Penalties. Misclassifying employees as independent contractors can lead to hefty taxes and fines from the IRS. Make sure you keep up with legalities, and if in doubt contact a law firm for guidance.
  • Potential Security Breach. Although it’s unethical for an independent contractor to pass information to a competing company, it still happens. The best way to make sure this doesn’t happen is to only provide independent contractors with the information they need to know, and keep any sensitive information between the business owner and employees.

Not sure if employees or independent contractors are the best fit for your business? We can help talk you through the legal ramifications of each and offer advice specific to your company. Contact us today!

Photo Credit: Victor1558

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