Hiring Independent Contractors Versus Employees

Jim Marshall - Independent Contractors Versus Full Time Employees

When it comes to getting work done in your business, you have the option of hiring independent contractors or traditional employees. Both types of workers can get the job done, but there are pros and cons of each that you need to be aware of.

Pros of Hiring Employees

There’s a reason why most companies make the commitment to hire traditional employees over independent contractors. Most companies need the stability of having the same employees day after day, in addition to the following three benefits.

Higher Qualifications

Employees tend to have higher qualifications and more education than independent contractors. When a person has acquired a professional degree or trained for years in a certain industry, they tend to go for jobs that will offer security, stability and substantial pay. Conversely, when a company is looking for solid experience and background, only a traditional employee will do.

More Company Loyalty

Employees exhibit more company loyalty than independent contractors. That’s because in a traditional employer/employee relationship there’s an understanding that the situation is long-term. Employees know that their success is tied to the company’s success, and they’re usually willing to work harder for a company that they know stands behind them. That loyalty is enhanced when the company makes efforts to reward employees who demonstrate commitment and dedication.

Better Company Culture

A company with employees is likely to have a better company culture than one that simply uses independent contractor. Traditional employees tend to think of their fellow employees as members of an extended family. As such, there’s a sense of community that exists, even if it’s informal or not officially recognized. Birthdays are celebrated, company outings are organized, and groups of employees may even opt to socialize outside of work.

Cons of Hiring Employees

Of course, hiring traditional employees has its downsides, too. Following are some of the drawbacks to consider:

Payroll Taxes

Payroll taxes often represent the biggest chunk of monthly expenses that a company faces. Whenever you have employees, you’ll have payroll taxes to take care of. This will never go away unless you decide to switch to hiring independent contractors.

Benefits Package Expenses

Businesses with as few as 49 employees are required by law to offer insurance. While that’s great for your employees, it does represent a financial burden, especially for smaller businesses. And, employers know that a generous benefits package attracts more qualified job candidates.

Salaries to be Met Regularly

When you have traditional employees on your staff, you have to meet salaries on a regular basis. Every two weeks or so, you need to come up with the cash to meet payroll, even if business hasn’t been good. Your employees get paid no matter how many sales you make in any period of time. That’s a heavy responsibility, which is why you need to carefully consider whether you should be hiring employees or independent contractors.

Pros of Hiring Independent Contactors

It’s probably clear that by now that there are many pros to hiring independent contractors. You’ll never run out of independent contractors to hire, either. There’s always a big talent pool to draw from, no matter what your industry is.  Here are more benefits to consider:

Fewer Taxes

You’ll have significantly fewer taxes to pay when you hire independent contractors over traditional employees. Independent contractors are responsible for their own federal, state and local tax payments, as well as their own Medicare and Social Security contributions. All you have to do is pay your independent contractors the sum they’re owed. Just be sure to get their tax ID number so you can send them a 1099 if you pay them more than $600 in one calendar year.

Easily Downsize When Business Slows Down

When you hire independent contractors, you don’t have to worry about being overstaffed when business slows down. If you find that you have too little business to keep workers occupied, you can simply not hire independent contractors. When business picks up, you can temporarily hire more workers to fulfill your business demands.

Hire and Fire at Will

Speaking of hiring and firing, you can do both of these at will when you use independent contractors. Unlike traditional employees, you don’t need to have a reason not to use a particular independent contractor for future work. Their work can be “on demand,” which means you use them when you want and don’t use them when you don’t want. This frees you from any need to have “just cause” when you no longer wish to have a certain independent contractor working for you.

Cons of Hiring Independent Contractors

Hiring independent contractors isn’t perfect, though. There are plenty of reasons to avoid using independent contractors, which are outlined below:

Customer Relations Could Suffer

It might not work to hire independent contractors for front-facing jobs. Independent contractors might not deliver the top quality level customer service that you’d like to see. Also, if customers are always interacting with a different company representative, the relationship between your company and your customers can’t really develop.

Vulnerable to Injury Claims

Since your worker’s compensation insurance doesn’t likely cover independent contractors, your company could be more vulnerable if one of them gets injured while working for you. Of course, a separate liability insurance policy may bridge this gap, but that’s an added expense so it’s something to consider.

Need For Accurate Records

Governments want to ensure that all records are accurate when a company uses independent contractors. This is partially because independent contractors are liable for their own tax payments, and some may try to get out of paying tax entirely. To cover your own position, you’ll need to carefully monitor how much you’ve paid your independent contractors, ensure that you send out 1099s by the January 31st deadline and adhere to all other government regulations regarding this non-traditional workers class.

As you can see, there are positives and negatives about hiring employees and independent contractors. Rather than choosing between the two, some businesses may even find that having a mix of employees and independent contractors is the most practical solution. Ultimately, you’ll need to decide which option works best for your business needs.

Have a question? Contact Jim Marshall.

Jim Marshall

Jim Marshall brings years of experience in tax and audit in a wide range of public and private companies large, medium and small. His experience includes responsibilities for major land acquisitions and dispositions and their structuring including publicly-held banks, savings and loan associations, mortgage bankers, real estate developers, insurance companies, builders and contractors. In addition to a strong background in all phases of tax and audit, Jim is a proven innovator and solution developer on both traditional and nontraditional alternatives.

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1 comment on “Hiring Independent Contractors Versus Employees”

  • Great article Jim! It was great to have all the pros and cons aggregated in one article. I wanted to add that the best way to get a contractor’s TIN number is to have them complete a W-9 form. It also helps to avoid backup withholding assessments which are typically 24% of everything paid to a vendor or the contractor. And penalties for not filing a 1099 timely can exceed $1,050 PER 1099. If you want ensure you always get a W-9 from new contractors and know whether a 1099 form is required to be provided, I would suggest readers take a look at an inexpensive online solution like http://www.w9manager.com. Here they can request and receive electronic W-9 forms that are certain to be filled out completely and signed.

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