Employee Versus Independent Contractor: The Pros & Cons
Let’s look at hiring an employee versus independent contractor including the pros and cons.
If you are wondering if you should hire full time employee or use independent contractor, don’t make the mistake of thinking they are basically the same thing. They aren’t.
Although both are hired to perform tasks for your business, they are not viewed the same by the IRS. And if the IRS suspects that you are not classifying your workers correctly, they might audit you. As you should know by now, auditors are not your friends.
Here is the IRS definition of an independent contractor: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
So, if you own a restaurant and hire two waiters, they would be employees. However, if you contracted a local handyman to come in as needed to fix anything minor that breaks in your restaurant, they would be an independent contractor even if you pay them hourly. The waiters show up to your place of business and work under you, while the handyman has his own business and simply shows up and fixes things his or her way.
There are many pros and cons to hiring full time employees and independent contractors. Most small business owners wish to avoid the added overhead of having a slew of employees, but some don’t have a choice. You’ll need to evaluate your situation to determine what is best for you.
Employee Versus Independent Contractor The Pros and Cons
Advantages of a hiring an employee:
When you hire an employee, and they 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. The advantages to this type of relationship for you, the employer, are:
- Employees will feel pride and status through the hierarchy of positions available.
- They want a paycheck that they can count on, so they will likely continue performing the job functions they are trained to do.
- Train them your way or it’s the highway. This is a great benefit if you are looking for an employee to provide very specific and skilled tasks.
- 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 a bit more.
- You don’t need to scramble to find help when your workload increases. If you only rely on independent contractors and need urgent help, your favorite freelancer might be booked. Or it might cost you a lot more to hire last minute.
- 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.
- You don’t need to continually train staff on how you like things done. Your employees know you and can do the work without the need for continual direction.
- If you want to take a vacation, you can be assured that someone is holding down the fort for you in your absence.
Disadvantages to hiring an employee:
As you consider whether you want to hire full time employees, you’ll need to consider the downside as well. There are certain requirements that come with having employees:
- Although it isn’t mandatory, most full time employees expect benefits, like health care and vacation time.
- The hiring process can be intense and time consuming. If you are not great at hiring the right candidate to work with you or your current staff, this could be a source of frustration.
- You’ll need to pay their salaries on time, even if your business has a lull. In order to cover their paychecks, you’ll need to have a reserve of money in your bank account.
- You’ll have specific payroll paperwork that is legally required. In addition, you will need to withhold your employees’ taxes, social security and Medicare.
- You are responsible for your employees’ training and professional licensing requirements. These vary from state to state.
- You will be responsible for issues like theft, sexual harassment, overtime, holiday pay, bonuses, stock options, retirement accounts, vacation, health related leave, unemployment, work related injuries, vehicles etc.
- They get paid even if the job is not done or not done to standard.
Advantages of hiring an independent contractor:
Small business owners usually prefer to hire freelance workers for jobs when they need help. There are distinct advantages to sticking only to independent contractors:
- Although you usually pay more per job or per hour, you will most likely save money overall since you aren’t required to pay them any benefits and do not need to commit to a salary.
- Flexibility. When you work with an independent contractor and it isn’t a good match, you simply don’t hire them again. When you have an employee that doesn’t work out, you may need to fire them, which isn’t always easy.
- You can hire the right person for the task needed, contracting someone with a specialized service. They often have many years of experience, so you don’t need to train them.
- They are responsible for their own permits and professional licenses.
Disadvantages of hiring an independent contractor:
While hiring independent contractors has many advantages, there are some drawbacks as well:
- You lose some control over how tasks are preformed, because you can’t closely monitor their work. You can guide them, but usually they aren’t on site and will run their business their way.
- They will not promote your brand, but their own. Their work is done under their business name, with their logos, etc.
- All copyrights will be owned by the independent contractor, unless you draft an agreement stating otherwise.
There are times when the line between employee and independent contractor can become blurry. Understanding the difference between an independent contractor and a full time employee will save you a lot of headaches in the future. Set up your business with the type of workers that you need for long-term success.