Employee vs. Independent Contractor - what's the difference?
Business owners often overlook the possibility of lowering their expenses for salaries, benefits and and related employment tax, by not looking outside their organization to fill staffing needs.
In addition, a small business owner can also in some instances reduce their overall risk by looking to outside sources of labor such as freelance personnel
Whether a person is a freelancer, working on an independent basis or as an employee at a larger firm, will generally depend on the nature of the work they do and the amount of control exercised by the employer over the work being done.
If the business owner feels the need to dictate how a job is to be done, or limit the actions of the worker, this may require the establishment of an employer-employee relationship.
Here are some things to think about when considering hiring a new staff member.
An Independent Contractor:
For most small businesses, independent workers tend to be used sporadically, only as an interim substitute before the hiring of a new employee. But a small business owner may be wise to consider outsources certain jobs on a permanent basis in order to reduce overhead.
Government agencies require every worker to specify their job status. For tax purposes the cost of not filing correctly can be very costly indeed. So be cautious because interest and penalties can be quite high, and the IRS is NOT fun to work with.
Selling of real estate is an example of an industry that depends heavily on the spirit of the independent contractor.
Real estate agents are typically not classified as an employee. Instead they agree to work on an independent basis so they only get paid when and if they sell a home. They benefit by associating their name with a well known brand in the market place, but they are fully responsible for doing the job and bringing in revenue to the firm.
The firm only gets paid if the agent is making money. In other words, any independent contractor who isn't doing his or her fair share in revenue can be dismissed at any time in favor of a more energetic and effective salesperson.
On the other hand, an independent worker can also move to a competing firm at any time, so it's important for both parties to clearly understand the mutual expectations.
If you are unsure as to whether or not you wish to hire an employee or an independent contractor, we recommend a more in dept discussion take place between you and your accountant.
To be sure, their are various risks and rewards associated with both types of employment, so it pays to do your homework to ensure you make the right decision for your business.
Business management articles provide an excellent resource for every team leader and small business owner. Take action on your business plan goals today! Download our free business planning tools to achieve your business development plan.