Independent Contractors or Employees? Discover What’s Best for Your Small Business
When your small business isn’t so small anymore it may be time to hire help. Money is still tight so you want to be sure you’re getting the most “bang for your buck” when considering new hires. But what route do you take? Do you take the plunge and hire employees or rely on contractors to fill your needs?
The Society for Human Resource Management (SHRM) recommends that you consider a variety of factors—and none of them in isolation—when deciding whether to meet a staffing need by means of independent contractors (ICs) or employees. The group also suggests that you work closely with a business attorney to weigh the requirements of the job, in combination with other factors, to determine whether an IC will both meet your staffing needs and withstand legal scrutiny, thus avoiding future problems.
Let’s take a look at the major differences between ICs and employees to help you make the decision that’s right for your situation.
Benefits of Using Independent Contractors
Forbes Magazine relates that several advantages are seen when using ICs rather than employees:
When you hire an employee, you are required to pay several expenses you don’t have to pay with ICs, including the cost of employer-provided benefits, office space, and equipment. You’ll also have to make required payments and contributions on behalf of your employees, including your share his or her Social Security and Medicare taxes (which comes to 7.65 percent of his or her total compensation); state unemployment compensation insurance; and workers’ compensation insurance. These payments can easily increase your payroll costs by 20 to 30 percent or more.
Working with ICs will allow greater leeway in hiring and firing of workers, which can be especially advantageous if you’ll be experiencing fluctuating workloads. You can hire an IC for a specific task or project knowing that he or she will be gone when the job is finished. The trauma, expense, and potential legal trouble that can accompany firings and layoffs is completely avoided.
Because most ICs bring specialized expertise to the job they can usually be productive immediately—eliminating the time and cost of training. With ICs, you can expand and contract your workforce as needed without taking on unnecessary expenses.
Employees are afforded a wide array of rights under state and federal law; they can potentially bring forth legal claims for any perceived violation of those rights. Because ICs are considered independent businesspeople, they are not protected by many of these laws. Employees can also sue for wrongful termination in circumstances that vary from state to state. ICs cannot bring this type of lawsuit.
Benefits of Using Independent Contractors
After reading about the possible benefits of hiring ICs, you may be thinking that you’ll never hire an employee again. But there are also important benefits you’ll see when hiring employees, as explained by Forbes:
If you want to exercise ultimate control over what goes on in your company or business, you should hire employees. Employees can be closely supervised and micromanaged to your heart’s content while ICs enjoy a certain autonomy to decide how best to do the job. If you interfere too much in an IC’s work, you risk making him or her look like an employee—in other words, someone for whom you should be paying payroll taxes, workers’ compensation insurance premiums, and more.
Many employers use ICs only as needed for relatively short-term projects. This means that workers will be constantly coming and going, which can be inconvenient and disruptive. And the quality of work you get from various ICs may be uneven. If you want the same workers available day after day hire employees.
Your right to fire an IC depends on your written agreement. You don’t have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC’s services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you could be liable for damages.
You may be liable for injuries an IC suffers on the job. In contrast, employees injured on the job are generally covered by workers’ compensation insurance. In exchange for the benefits they receive for their injuries, these employees give up the right to sue their employer for damages. ICs are not covered by workers’ compensation, which means that they can sue for damages if they are injured on the job because of your carelessness.
If you hire an IC to create a work that can be copyrighted—such as an article, book, or photograph—you may not be considered the owner of the work unless you have a written agreement transferring copyright ownership from the IC to you. If an employee creates such a work, you automatically own copyright of the work in most circumstances.
Avoiding Tax Complications
State and federal agencies, particularly the IRS, want to see as many workers as possible classified as employees, not ICs. The reason is financial: The more workers classified as employees, the more tax and insurance money flows into government coffers and the harder it is for workers to underreport or hide their income from the agency.
Your business could face an audit if it appears you’ve misclassified employees as ICs. At the state level, you could attract the attention of your state’s unemployment compensation or workers’ compensation agency if a someone you classified as an IC applies for benefits. You could also face an audit from your state’s tax agency.
It all comes down to this: Whether you hire a contractor or an employee will depend greatly on what kind of position you’re trying to fill and how you see the position developing. If it’s a short-term position that doesn’t involve the kind of expertise you need to have on tap all the time, hiring a freelancer can be a great alternative for your small business.
Making complex hiring decisions for your small business can be a daunting task. Trying to choose between hiring employees or contractors? Let Oliver & Cheek, PLLC guide you and assist in the mapping of future expansion. For more information, call (252) 633-1930 or visit www.olivercheek.com.
(Sources: U.S. Small Business Administration; Internal Revenue Service; Society for Human Resource Management; American Bar Association; Entrepreneur Media, Inc.; CNN Money; The Balance; Due, Inc.)