Independent contractor versus employee pros and cons is important to know when thinking of hiring as a small business owner.

Employee Versus Independent Contractor Overview

The two titles are not the same thing, even if you pay them both to do tasks for you, as the IRS doesn't see them the same. As a business owner, if the IRS suspects your classifications are off, they can audit you.

  • IRS defines an independent contractor as someone who the payer has the right to direct the end result of the work, but not what or how it will be done. 

Hiring contractors or employees have their pros and cons. 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 understand the difference between the two, you can set up your business to hire the type of workers needed for the long term.

Hiring Employees

An employee is someone who works in the service of someone else under an implied contract of hire where the employer has the right to control how the employee does the work. Hiring an employee means complete control of that person's work, training the person to work to your standards, and have the person work only for you. 

Employees, though, come with a lot of laws and regulations as the state and federal governments regulate salaries, overtime, and work rules.

You have to also follow the payroll tax requirements, as well as paying half the FICA taxes, like Social Security and Medicare. You also have unemployment and worker's compensation insurance to take care of.

The advantage of an employee is that the person will work for you for 30 or more hours a week and have a long-term commitment to your business. 

  • Employees feel proud of their position in the company. They want the security of a work they can call their second home and the long-term job, while feeling part of the group. 
  • The hourly wage of a full-time employee is less because there is job security. If you were to hire a freelancer, you can expect to pay more for their services.
  • You don't have to worry about an increase in work because you have reliable workers, as freelancers can be booked if you need them.
  • You don't have to do everything in your business and can assign different people assignments, which frees up time for you to do other things.

There are also disadvantages to hiring employees:

  • Most full-time employees expect benefits, like vacation time and health care.
  • Pay has to be done consistently, even if the business has a period where it's not growing.
  • You have to have a payroll paperwork, which is legally required.
  • You have to cover the employees training and licensing for work.
  • You become less involved in the day-to-day business of your company and gain people management skills as your business grows.

Hiring Independent Contractors

The positive and negative of hiring independent contractors is the opposite of that for employees. You don't have a lot of tax responsibilities for a contractor. You report the amount paid to the contractor on a 1099-MISC, and you don't have to withhold pay for FICA taxes.

The advantages of hiring independent contractors include:

  • Saving on benefits and a salary as you are not required to pay these to a contractor, even if the pay per hour can be higher than an employee.
  • You have a choice to work with the contractor if you want to or not, while it's not easy to fire an employee.
  • You can hire a specialized person for a particular task because they often have years of experience already.
  • Contractors have to figure out their own work permits and licenses.
  • There are no health benefits for contractors, which can save you money.

There are also disadvantages to hiring an independent contractor:

  • You don't have control over how a task is done since you can't see what they're doing.
  • They are hired for a short time so you might get someone else for the next project.
  • There is no sense of company loyalty and will not promote your brand.
  • Unless you write a contract stating different, the copyrights belong to the contractor.
  • There are no fixed rates, which can vary depending on the project.

If you need advice with hiring a independent contractor versus employee pros and cons, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.