Pros and Cons of Hiring Employees vs Contractors

Company payroll automatically deducts employee taxes from monthly pay stubs. Sole proprietors and partners, on the other hand, must pay contractor taxes independently, according to federal law. Companies they work for don’t pay or hold any taxes on their behalf.

On the other hand, if you only control the results of that work (but not the process itself), then they’re an independent contractor. Employees work directly for their employers, meaning they’re legally entitled to employee rights. Likewise, as an employer, you have certain responsibilities toward your employees. Understanding the difference between an independent contractor and an employee requires careful consideration, and both types of employment come with unique advantages and disadvantages.

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Initial onboarding procedures such as background checks, contract review, and compliance tasks can be streamlined with software by outsourcing onboarding to a company like MBO. You can automate tasks like background checks, payment, and engagement documentation. Here’s a handy independent contractor vs. employee chart to help you understand the biggest differences between the two types of employment.

They are generally hired to perform specific job duties and are governed by company policies and procedures. Luckily, the IRS has a webpage dedicated to this topic to help you determine the difference between an employee and an independent contractor. Based on the above scenario, Tim might be classified as an independent contractor by Company E if he meets all the required common law rules. Company D also reimburses Tim for his mileage and vehicle costs, which is typical of an employer-employee relationship. Company D reimburses Tim for mileage and other expenses for using his personal truck to complete the work.

What is an independent contractor?

You must also comply with payroll tax requirements, including paying half of the FICA taxes (Social Security and Medicare) for each employee and collecting the other half from the employee. Other responsibilities include payment of unemployment insurance and worker’s compensation insurance. Some companies attempt to take advantage of that ambiguity by classifying legitimate employees as contractors—to avoid paying employment taxes and having to provide benefits. Because of that bad behavior, federal and state tax authorities are strict about what constitutes a contractor. Many businesses mistakenly believe that they have some freedom in determining how to classify their workers, but this just isn’t the case. If you pay a worker who should be an employee as an independent contractor—and have no basis for it—you might be held liable for employment taxes for that worker along with interest and penalties.

In most cases, the IRS will assess the situation and cut employers off when they think it was an honest mistake. Nevertheless, if the IRS deems the misclassification intentional, the misclassification is considered fraud, and the guilty party may face criminal prosecution and even jail time. The IRS determines the worker’s status by examining how the parties work together instead of what’s written on the contract.

How many hours is a part-time job?

There are many financial benefits to engaging independent contractors, including not having to provide traditional benefits such as health insurance, stock options, or retirement plans. Independents also do not receive the same legal protections—unemployment, anti-discrimination, and Workers’ Compensation—as employees. Nevertheless, it is good practice to ensure independent contractors have basic insurance requirements built into their contract to protect against any legal issues. Every state has its own set of tests to determine if you’re an employee or a contractor. And once your status is determined, state law may require an employer to provide things like workers’ compensation insurance, fair labor practices, unemployment insurance and more.

The problem is, of course, that employers can come to over rely on independent contractors and, over time, begin to treat them as employees. When this happens, big problems arise for the company despite any good intentions on their part or on the part of the contractor. Most business owners want to avoid the overhead of having many employees, but this cannot always be avoided. Each situation has to be taken into consideration to make a decision. If you’re used to full-time employment, you may already be piecing together the difference between independent contractors and employees.

All Rights Reserved: The Meaning of the Phrase and Its Applications

While control may seem cut and dry, it’s a really important consideration to factor in before you choose between an independent contractor or employee. Otherwise, you may exert too much control over how a contractor works and end up in hot water with the IRS or the Department independent contractor vs employee pros and cons of Labor. Choosing between contractors and employees is a pivotal decision that shapes your workforce and your business. Let’s explore the dynamics of hiring contractors versus employees, helping you make informed decisions that align with your business needs.