Independent Contractors vs. Employees: Finding the Best Fit for Your Small Business

By: Emily Klaus | Marketing Associate

One of the most important tasks a small business owner has is finding the best hiring fit for his or her business. Sometimes, the help is only needed through a busy season or for a specific project, which is where independent workers or contractors can be an immense help. However, as with any small business decision, it is important to weigh the advantages and disadvantages of both sides. Knowing how to categorize this individual is critical for tax purposes as well as making sure both you and the potential hire are on the same page for job requirements and pay.

First, small business owners should know the differences between an independent contractor and a regular employee.

An independent contractor:

  • Operates under a business name
  • Has his or her own employees
  • Advertises his or her businesses’ services
  • Invoices for completed work
  • Has more than one client
  • Has own tools and sets own hours

A regular employee:

  • Performs duties dictated or controlled by others
  • Is given training for work to be done
  • Works only for one employer
  • Works on the employer’s premises

Benefits of a Contract Worker for a Small Business

There are many benefits to hiring an independent contractor over an employee. Small business owners can expect to save money in labor costs, have reduced liability, and increased flexibility in hiring and firing these individuals. When hiring a contract worker, small business owners reduce their chance of lawsuits. These individuals do not have rights to form a union, are not covered by minimum wage or overtime pay, are not protected from employment discrimination, and do not have rights to maternity leave or family sick leave.

Although hiring an independent worker may seem like it will cost your small business more in the short run, these individuals will likely cost you less in the long term. Regular employees generally come with more expenses, including Social Security and Medicare taxes, unemployment compensation, health care, retirement funds, and worker’s compensation. In some cases, these expenses will up your payroll significantly, making a contract worker a better financial fit for your small business.

Another benefit of hiring an independent contractor is that these individuals usually have a specialized skill set. They might be especially versed in accounting, social media or inventory management. At first glance, it might seem like independent workers will be more expensive, but because of their unique skills and familiarity with the project at hand, these individuals will likely complete a task or project much quicker than their employee counterparts, saving you both time and labor costs.

Disadvantages of a Contract Worker

One of the main disadvantages of hiring a contract worker is that a small business owner will have little control over this individual. Independent contractors are often working for themselves under their own business name, set their own hours and schedules and can be working on projects for a handful of different clients all at one time. With growing access to the Internet and the portability of devices, freelancers can now work from even the most remote of areas. This decreases a small business owner’s day-to-day control over this worker and the project at hand.

Another drawback is that the work an independent contractor does for your small business is not legally considered yours. If you are hiring the worker to create an article, jingle, photograph, etc., this piece of work is owned by the contractor. If you want to have the legal ownership of this work, you must utilize a written agreement that transfers the copyright from the contractor to you and your business. For more information on these types of agreements, click HERE.

Although it’s not necessarily a drawback, ensure you are specific and careful in your wording of the job description in the contract.The scope of the work to be done should be clearly defined to avoid any future conflicts between you and the independent contractor. As with any type of employee, communication is very important!

Tax Distinctions

One important consideration when choosing between an employee and a contract hire is how your decision will affect your taxes and theirs.

For you as a small business owner, it is absolutely critical that you determine this individual’s status. Ramifications for misclassifying a contractor can be costly. Between fines, tax consequences and reimbursing the employee for lost wages and retirement compensation, expenses associated with this mistake can quickly add up. Use the IRS 20-Factor Test to ensure you are following all rules and regulations in hiring and paying a contract worker. As a general rule of thumb, the more control an employer has over a certain individual, the more likely it is that the individual should be considered an employee.

If you and the worker in question are still unsure as to what his or her status is, file the IRS Form SS-8. The IRS will review your unique situation and make a determination. Keep in mind that this process may take up to six months, but will be financially and legally beneficial in the long run if a worker’s status is questionable.

Jet Capital understands that cash flows do not always match up with business needs. If your small business needs working capital to hire a contract worker or new employee, apply online today or call 866-845-9674 and get your funds as soon as the next business day*.

*Assumes same-day application, submission and verification of underwriting documentation, and initiation of wire funds transfer before 5 p.m. Eastern Time. Upon receipt of underwriting documents and final approval, Jet Capital initiates a wire transfer which, subject to your financial institutions processing policies, could be available as early as the following business banking day.

References:

  1. https://www.sba.gov/starting-business/hire-retain-employees/hire-contractor-or-employee
  2. http://www.nolo.com/legal-encyclopedia/pros-cons-hiring-independent-contractors-30053.html
  3. http://www.forbes.com/2006/10/10/contractor-IRS-union-ent-law-cx_nl_1011nolo.html
  4. http://www.bankrate.com/finance/taxes/employee-vs-contractor.aspx
  5. https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee


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