There are a myriad of decisions small business owners have to make on a daily basis, one of which is deciding between hiring independent contractors and hiring employees. While there are pros and cons to both types of workers, you might be asking yourself: What’s the difference between the two and which type of worker is right for your company?
First off, the IRS classifies these two categories of workers differently. It uses three characteristics to determine the relationship between businesses and workers: “Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means; Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job; and Type of Relationship factor relates to how the workers and the business owner perceive their relationship.” In other words, the IRS deems a worker as an employee only if the company can control what work is assigned and how the worker completes the task. If, on the other hand, the company dictates solely the results of the work and how it’s utilized, then the worker would be categorized as an independent contractor by the IRS.
Given these distinctions, it’s important to keep in mind that hiring an independent contractor brings a different set of benefits and drawbacks to your company compared to a full-time employee:
Pros to Hiring an Independent Contractor:
- Can save you money since they will probably work off site and on demand; therefore you’ll spend less on office space, supplies, etc.
- Can cost you less since they are responsible for withholding their own taxes and paying for their own benefits.
- Usually is an expert in his or her field and is fully trained and specialized.
Cons to Hiring an Independent Contractor:
- An independent contractor owns his or her IP
Pros to Hiring a Full-Time Employee:
- Usually has set hours and can be reached more easily.
- Tend to have more loyalty to the company and are willing to take on various functions in the office, contributing to company growth.
- The company usually owns all intellectual property that the worker creates.
Cons to Hiring a Full-Time Employee:
- Will require a small business to comply with the following federal and state regulations (including but not limited to): obtaining an Employer Identification Number (EIN), setting up records for withholding taxes, verifying employee eligibility, registering with your state’s new hire reporting program, obtaining workers’ compensation insurance, and posting required notices enforced by government agencies.
So let’s return to our original question: should you hire independent contractors? The answer: It depends on your industry, professional needs, and pool of available workers. If you do decide to hire an independent contractor, be aware that there are various steps you can take to facilitate their employment. It is in your best interest to contact your business, tax, or labor attorney to determine which type of worker is right for you.