Hiring Employees vs. Independent Contractors for Your Small Business

There is a growing trend among businesses today toward hiring independent contractors rather than employees to perform certain tasks. For certain specialized areas that require greater expertise, hiring a contractor may make sense. However, there are some drawbacks to this option as well. Business Hiring

Here are some of the advantages of hiring independent contractors for your business:

  • Payment per Job Only: Independent contractors typically charge by the job rather than hourly. And although the hourly rate for a contractor is usually higher than for an employee, contractors are only paid for work performed and not for downtime when business is slow. This normally ends up saving the company money overall.
  • Flexibility: Independent contractors are hired for short-term work. As such, if you hire a contractor and they are not a good match for your company, there is no need to hire them again. Employees who do not work out can be more difficult to terminate, and you are often required to go through certain procedures before letting them go.
  • No Payroll Taxes Owed: Hiring contractors saves the business money on payroll tax obligations (roughly 7.5% of the employee’s wages). The contractor is responsible for 100% of their own self-employment taxes.
  • No Need to Pay Benefits: Benefits packages for full-time workers can add up to 20% to 30% of their wages. When you hire a contractor, you save more money not having to pay benefits.

Here are some of the disadvantages to hiring a contractor:

  • Less Control over Work Performed: Independent contractors, by nature, work with little or no supervision. In fact, many of them do not even work on-site. This makes it harder to supervise their work and control the outcome of the job.
  • Unpredictable Work Quality: Because contractors are typically hired for short-term projects, it is not always easy to get the same person again when you need more work performed – unless you already have a long-term working relationship. This can make it difficult to receive the quality of work you need, especially when you have a job you need done on short notice.
  • No Loyalty to the Company: Contractors work for themselves, not the companies that hire them. This means their top priority is to promote their own work, not the business they are hired by. While many employees have pride in the company they work for, this is generally not true of contractors.

Pay Attention to Classification Rules: Businesses are not allowed to call just anyone they hire a contractor. There are certain definitions they must meet, as laid out by the IRS. In general, this has to do with the difference in working relationship between a contractor and employee. In the employer-employee relationship, the employer controls what work is to be done, how it is to be done and the desired result. In the business-contractor relationship, the business controls only the result of the work, but it is generally up to the contractor what work they do and how they do it.

For example, a retail store owner with two cashiers must call them employees. On the other hand, if that same retail store owner hires a builder to do some modifications to the premises, the builder can be classified as a contractor. In many industries, there is a lot of grey area. One example is taxi cab drivers. Some cab services directly employ their drivers, while others are independent contractors. It depends on the unique circumstances of each company.

The important thing to remember is if the IRS suspects that you are misclassifying workers who should be called employees as contractors, you could open yourself up for an audit. And if it is determined that your workers are misclassified, it could become very expensive to fix this mistake. If there is any question about the status of particular workers in your business, it is best to speak with a small business accounting firm for more specific guidance.

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