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Understanding the difference between an employee and contractor
Today, more than ever, businesses are evaluating the need for full time vs. part time employees. Many firms are also considering using a third party firm for certain functions. Before you make any decisions about contracting out job functions, read this.
Advantages of hiring an employee
- Employees can sometimes take on multiple roles within the firm.
- Work flow and managing projects can be more effective with an employee.
- Employees will have strong loyalty to the business which can result in increased productivity.
- It is easier to manage employees, as the business has more control. Independent contractors will have other clients to report to and manage.
- With employees, your costs can be fixed to some degree. Independent contractor rates will vary depending on market demands.
Advantage of using an independent contractor
- No health benefits need to be paid to a contractor. Health costs can add over $5,000 annually to the per employee cost.
- Your cost tends to be focused on specific tasks or projects.
- Ability to have work on demand. Many small businesses may have seasonal needs or business work flow that is better suited to an independent contractor rather than another full time employee.
- Reduced overhead. With a contracted employee, businesses don’t have the added costs of phones, workers’ compensation, computers, training, benefits, and payroll.
- You will have less management responsibility with an independent contractor.
- Depending on the functions, independent contractors may have more skills and training giving you the same advantages as larger firms.
As you consider this topic remember that there are tax and legal issues you should consider. We recommend you consult with professionals for specific information.
- If you hire an independent contractor just to get around benefits and legal issues and the contractor works exclusively for your firm, they may not be considered truly independent.
- Under workers’ compensation laws, if you control the person and work to a large degree, you may not be able to avoid responsibility. Check with your insurance agent.
- Depending on the function, you may want the independent contractor to have professional liability insurance.
- We recommend you have a written agreement with the independent contractor which should outline all legal issues.
- The IRS uses 20 factors to determine if a worker is an employee or an independent contractor. However, it is their interpretation (although it could be challenged). Not all factors apply in each case or carry the same weight. http://www.uncsa.edu/formsprocedures/IRS.htm