Hiring workers as employees vs independent contractors with Hector Garcia | QuickBooks Payroll
What is a contractor?
Whether operating as a limited liability company, a sole proprietorship, or a limited liability partnership, a contractor is a self-employed individual who works with a business. Usually, they bring their own equipment for the job and send invoices for payment.
Businesses do not withhold taxes for contractors. Instead, the individual is responsible for paying self-employment taxes. Contract employees are also exempt from labor and employment laws. Contractors are typically employed by businesses to work on specific tasks or projects, and their contractual relationships can be either short- or long-term. Although they are employed by the company, contractors are not on the payroll. They can also do jobs for multiple businesses simultaneously.
Common examples of independent contractors include:
What is an employee?
A person that an employer hires to perform a specific task is known as an employee. Employees are people who follow instructions from managers and other professionals in a company.
Regarding these three variables, employers have a certain amount of control over their staff members:
Employers must categorize workers for tax purposes based on the number of hours they put in or the anticipated length of the job. Particular taxes, such as local, state, and federal income taxes as well as other taxes like FICA (Social Security and Medicare), are withheld from employee paychecks. Additionally, employers are obligated to pay for workers’ compensation and unemployment insurance.
Cons of hiring a contract worker
Although there are many advantages to using contract workers, there may also be some disadvantages:
Increased liability for on-the-job injuries
Employees on-the-job injuries are covered by their employers insurance. Such insurance grants compensation to injured workers in exchange for the right to sue their employers. Contract employees who are hurt at work and can demonstrate employer negligence may sue for damages, unless they have their own insurance.
Less control over workers
Typically, contract workers work independently, deciding for themselves how best to complete tasks, what tools they’ll need, and how long it will take. It is preferable to classify those workers as employees if an employer wants to oversee every aspect of what they do and how they do it.
Temporary staff
Employers use contract workers for specific projects. Once a contract employee completes their task, they have the option to renew or move on to another position. Due to the fact that they frequently work for multiple employers, contract workers also don’t have the same level of loyalty as in-house employees. It is frequently preferable to employ those workers if a company has a long-term project and needs to rely on them.
Pros of hiring an independent contractor
The following are some benefits of contract employment over in-house employment:
Saves money
Despite the fact that employees typically earn more than contract workers, hiring an employee comes with additional costs for things like employee benefits, taxes, and office space.
Greater flexibility
Employers have greater flexibility when hiring and dismissing contractors. Independent contractors can be hired by employers for a specific project, and after they complete it, the employer can quickly fire them in accordance with the terms of their contract.
Competitiveness
Businesses may hire more contract workers in order to tap into a large talent pool, maintain their competitiveness, and attract more skilled workers who are looking for the flexibility that contract work offers.
Reduced liability
Employers must comply with several laws designed to protect employees. These include the right to:
Employers can control the terms of their employment relationship and significantly reduce their liability if a claim is made against them by hiring independent contractors.
Enhanced efficiency
Specialized skills are offered by contract workers, who frequently require little training to be effective. They can spend more of their working hours on the manual tasks they were hired to do because they frequently don’t need to attend other business tasks or company meetings.
Pros of hiring an employee over a contractor
Here are some important advantages to the employee-employer relationship:
Company loyalty
Compared to independent contractors, in-house staff may be more committed to your company. When you hire staff and offer them full-time employment benefits, you demonstrate your confidence in them and commitment to their development. They are therefore more inclined to stick with you and support you as your business expands.
Streamlined training
Although an independent contractor generally needs less training than an individual in-house employee, you might end up spending more time if there is a lot of turnover with short-term contractors.
Brand ambassadors
One great advantage of hiring staff for your company is that they can serve as brand ambassadors. Employees have a vested interest in seeing your business succeed, unlike independent contractors who may support it while promoting themselves.
Cons of hiring an employee vs. a contractor
Here are some possible drawbacks of using employees as opposed to independent contractors:
Less flexibility
You have more business flexibility when you work with independent contractors. You can hire people to help you with a specific task for just a few days or hours. You can hire a different contract worker with the skills you need to pursue that goal if your company’s direction changes. Changing your mind about a committed employee is more difficult.
Employee benefits
Despite the fact that employee salaries are typically lower than independent contractor hourly rates, employees still require additional business expenses. With employees, you might need to provide other benefits like medical insurance in addition to paying their taxes and pension.
FAQ
What are the benefits of hiring a contractor vs an employee?
More affordable — Even though you might have to pay an independent contractor more per hour, your expenses will probably be lower overall. You are not required to provide healthcare benefits, withhold taxes, pay for workers’ compensation, unemployment insurance, or pay for office space or equipment.
Should I hire someone as an employee or independent contractor?
Employing independent contractors allows you to avoid some of the expenses that come with having full-time employees. According to the U. S. According to the Department of Labor, benefits alone can make up more than 30% of the total amount paid to employees. This year, employers spend an average of $10. 70 per hour per employee on benefits!.
What is the difference between hiring an employee and a contractor?
An employee is paid a salary and receives benefits from a company in exchange for adhering to its rules and showing loyalty. An independent worker with flexibility and autonomy who does not receive benefits like health insurance or paid time off is referred to as a contractor.
Is it better to employ or contract?
Even if the payments are made in milestones, if you pay a worker on a project-basis, that employee is more likely to be a contractor. Benefits. The likelihood of the worker becoming an employee increases if you provide them with employment-style benefits (such as health insurance or paid time off).
