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"Should I hire an independent contractor or an employee - and what's the difference?" These are two important questions new business owners must be able to answer to make certain they are running their business most effectively.
The answer will depend greatly on the kind of business you have and how it is structured. There are definitely advantages and disadvantages to either choice of worker, so we'll walk you through the important things to think about so you can make an informed business decision.
Independent contractors are viewed by the IRS quite differently than full-time or part-time employees. Employees are paid a salary or hourly wage and on top of that there are other associated benefits like health insurance, vacation and sick time allocations. Independent contractors are paid strictly for the time they charge, which is usually calculated by the number of hours worked or for completing a specific project.
When it comes to dealing with the IRS, always report the status of your workers accurately. If the IRS suspects you are reporting workers incorrectly you could be audited, which can be a long and stressful process. If the IRS discovered any false reporting, it could be very costly and potentially jeopardize the success of your business.
Whether a person is a freelancer (working on an independent basis) or as an employee, will generally depend on the nature of the work they do and the amount of control desired by the employer over the work being done.
If the business owner feels the need to dictate how a job is to be completely, or closely direct the actions of the worker, this may require the establishment of an employer-employee relationship. Independent contractors are responsible for completing a job on time, in a quality way. However, they have much more flexibility in where they work; how they work, and when they work.
“I hire people brighter than me and then I get out of their way.”
- Lee Iacocca, CEO of Chrysler
Contract employees often work on projects from multiple businesses so they have to manage their time and resources closely. Whereas employees may not be as concerned about the time they spend on a project, or the amount of resources they consume to get the job done because they are not the person paying the bills.
On the other hand, employees create stability as they provide valuable bench-strength to fill unexpected personnel openings when they occur. Employees also seek promotions throughout the organization, which requires a commitment to doing quality work. They represent the business in their off hours and they are more loyal to the employer.
Let's take a look at the many other Pro's and Con's of hiring employees vs. independent contractors.
- Warren Buffet
While it's important you understand the differences between hiring independent contractors vs. employees, the good news is that you don't have to choose one or the other. Many employers hire a core group of staff employees and as needed supplement with independent contractors as needed.
For example, you may have a big project that needs to be completed in a relatively short period of time. Short term needs do not require the hiring of long term employees so this is where contract labor provides a great value.
Consulting with a CPA to make sure you understand your legal responsibilities to hired personnel is always a good idea, particularly if you are a first time business owner.