Pro's and Con's of Hiring Independent Contractors vs. Employees

"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.

“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you.”

- Warren Buffet

Independent Contractor vs. Employee

Pro's

Independent Contractor

Independent contractors value their independence and the ability to manage their own time. They are confident in their ability to earn enough to pay their own bills and don't mind the fact that they start from zero at the beginning of each month.
While the hourly wage is usually higher for a well qualified contractor, the overall cost is less because they are responsible for their own insurance and other benefits.
When a contractor is not a good fit, for whatever reason, you do not have to retain or rehire them.
As work requirements change, or you need a different level of expertise you have greater flexibility to change contractors. This can save on time and training costs.
Independent contractors are responsible for the cost of any required certifications or continued education.

Employee

Employees value job security knowing they will be paid regularly and on time.
They feel a connection to the people they work with and the business they work for.
Employees value being a part of something larger than themselves. They enjoy working closely on a team.
Employees provides workers you can count on to fill resource gaps when work requirement increase.
Business owners can delegate important tasks and responsibilities to trusted employees, effectively lessening their workload and associated stress. You'll still want oversee the outcomes, but the time required by you is significantly decreased.
Employees make it easier for business owners to be away from the business when necessary. For example, to attend a conference, take vacation, attend important family gatherings, etc.

Con's

Independent Contractor

Contractors don't have to accept your next project. They may not be available when you need them. Contractors will often accept work that consistent. Unless you have ongoing needs, you may be lower on their priority list.
Because independent contractors are not on staff, they may not be as committed to the success of your company.
They do not promote your brand in their community. If anything, they are promoted their brand. They have their own business to promote and that is their focus.
Unless you have a written contract to the contrary, any copyrights are the property of the independent contractor.

Employee

Full-time employees want to work for a company that offers a full plate of benefits. e.g. medical, dental, vision, life insurance, disability, etc. To be competitive in attracting top talent, you'll want to offer as much as you can to compete in the marketplace.
Payroll is going to be your biggest expense. Employers must meet payroll on time or risk losing good people. Not paying staff erodes a leader's credibility and earns the business a bad reputation.
Payroll also requires you to pay taxes and report in a timely manner to the IRS. The paperwork involves in payroll can take time and you may wish to hire a bookkeeper for this task.
Training expense is always higher with employees. Ongoing education and fees for licensing or certifications may also be required depending on your business type.

In Conclusion

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.