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As a small business owner, you’ve probably hired your fair share of workers. Whether it’s contracting a graphic designer to create a new logo or hiring a new employee to help increase sales, the contractor vs. employee relationship often feels like treading murky waters. To help clarify this complex subject, here are the basic differences between an independent contract worker and a full or part time employee:

Independent Contractor

An independent contractor is a self employed worker who provides professional services through their own company. A sometimes difficult status to define, the IRS says if you hire an independent contractor, your company may not control what the worker does and/or how the worker does his or her job. You may assign the scope of the project with necessary details and deadlines but you may not direct how and where that work is completed. Basically you get to lay out the expected results and the price you’re willing to pay, but the how, where and even exactly when is up to the independent contractor.

Pros

  • Your company is not required to supply contractors with benefits. You are also not locked into providing a salary, which comes with tax and unemployment obligations.

  • If the contractor isn’t a good match for your company, you don’t have to hire them again and you only have to pay for work that’s been completed to your satisfaction

  • You don’t have to spend time, money or resources training a contractor as they are hired for their specialized skills.

  • Lower exposure to legal action. Permanent employees have numerous rights and protections under federal and state laws. Many of these laws do not apply to independent contractors. For example, contract laborers do not have the right to overtime pay, form a labor union, take time off for a sick family member or to spend time with a new baby.

  • Liability for poor or unsatisfactory work falls on the contractor

Cons

  • You have less control over your workers. Unlike employees, whom you can closely supervise and monitor, independent contractors enjoy a certain autonomy to decide how best to do the task for which you hired them.

  • All copyrights belong to the independent contractor unless otherwise specified in the contract.

  • They will not promote your brand, but their own. Their work is done under their business name, with their logos, etc.

  • The quality of work you get from various contractors may be uneven and quality control may be difficult to manage.

  • Contractors often lack the loyalty of a full time employee as they have the freedom to work with other companies on a variety projects and yours may not be the most exciting one on the list!

Company Employee

A person who works for another person, or for a company for wages or a salary.  When you hire full time employees, they will work for you thirty or more hours a week (fewer hours makes them part-time) and will usually have a long-term commitment to you and your business.

Pros

  • The hourly wage for a full time employee is often much less, because they have job security. If you were to hire out for the same work with a freelancer, you can often expect to pay quite a bit more.

  • Everything your employee creates during company time using company equipment is owned by your company, not the employee.

  • You have control over when and where employees work, as well as the right to regular performance reviews and employee feedback.

  • You don’t have to wear all the hats of your business yourself. Instead, you can delegate tasks permanently to others. This frees up your time to do the tasks best suited for you

Cons

  • Tax Liability – When a worker is an employee, employers must pay state and federal unemployment tax, social security tax and workers compensation/disability premiums to a State Insurance Fund. When a worker is an independent contractor, the hiring party is not required to make any of these payments. Should employers incorrectly define a worker as an independent contractor, they may find themselves liable for past taxes including FICA and federal unemployment tax.

  • You’ll need to pay employee salaries like clockwork, even if your business has a lull. In order to cover their paychecks, you’ll need to have cash reserves in your bank account.

  • You are responsible for equipment, training, benefits, paid time off, office space and other perks that help retain quality employees.

There are times when the line between employee and independent contractor can become blurry – so if you are in that blurry zone best to talk to your CPA about the IRS guidelines to get some help on determining the correct independent contractor vs employee status.

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Need help determining the costs of employees vs independent contractors?

Virtual BeanCounters serves entrepreneurs with an empowering finance division so they can focus on innovation and creating value for their clients. We believe you can accomplish the business of your dreams a lot easier with a professional accountant on your team! Contact us by phone at (913) 649-1040 or click here to visit our Contact page.

Sources:

Legal Zoom

IRS

Small Business Administration