The employee works for you while the contractor simply shows up and fixes things his or her own way. Independent contractors must make sure they don’t pierce the “corporate veil,” meaning that they must operate the LLC as a legitimately operating entity with a distinct difference between the LLC and its owner. Most of these protections are not extended to independent contractors, who pay their own taxes, don’t have mandated time off, and can’t form unions. Hiring contractors can thus make you less susceptible to a nasty legal battle.
That contractors will expect some freedom in performing their duties. If an employer is someone who seeks full control over all their workers and projects, then hiring independent contractors would not work out best for them.
Pros and Cons of Being an Independent Contractor | NESTA
This means that workers are constantly coming and going, which can be inconvenient and disruptive. Employers who want to rely on the same workers day after day are better off hiring employees rather than ICs. Employees develop an employer-employee relationship with a company, and full-time employees are likely to dedicate all working hours to the company.
Annually with a freelancer when you factor in not having to pay for benefits, like health insurance and retirement, as well as Medicare and Social Security. If your worker is remote, you also reduce the need for office space and lower your office supply costs. The rise of freelance nation has largely been a win-win from both sides of the desk. Employers experience financial savings with independent contractors, and lower their risk. Workers use freelancing to tide them over between jobs, to add to income, and some are in it for the flexibility.
Contractors could also provide a certain type of flexibility that permits them to work at odd hours which may come in handy for your business when the permanent employees refrain from working at quirky hours. Moreover, this flexibility also protects the core staff positions by hiring contractors only during busy seasons to maintain a balance with the employee headcount for the year-end cycle. In most cases, hiring managers hire employees directly rather than evaluating the merits of hiring contractors or freelancers. It could be a tedious process to hire the right talent as employees for an open position. Whereas, independent contractors would be subject matter experts by themselves and would have a wide network with other similar professionals. It would simplify the process of hiring the best talent in the industry.
Click here to download an eBook full of expert tips on how to develop a game plan to safely and effectively manage contract labor. Being paid in cash, check, on the book or off the books, may still classify a person as an employee under the FLSA. If you were to hire out the same work to a freelancer, you would have to pay much more. I can’t believe I’m really writing this post, since it’s pushing 100 degrees outside right now.
Pros of Independent Contracting
While being an independent contractor comes with advantages over being an employee, there are drawbacks, as well. It’s best that all workers, especially those considering independent contract work, understand the pros and cons of this classification. As a result, I put together a Risk Panel Discussion event with some of my networking partners, right before COVID lockdown in 2020. Coinciding with this were several discussions in many of my QuickBooks ProAdvisor® peer groups regarding best practices for managing independent contractors. It became apparent to me that it was time to make the switch from independent contractors to employees. Independent contractors are not permanent employees on your company’s payroll. You assign your company employees a work schedule and provide them with mandatory benefits, training, and working tools.
Unless explicitly indicated in the independent contractor agreement, a contractor owns the copyright for the intellectual property he or she creates on the job. Conversely, employers usually own any IP that their employees make, giving them more ownership over sensitive information. Companies generally can’t reimburse independent contractors for out-of-pocket expenses, so you should factor in those expenses when determining your rates. If your clients provide the tools, then one of the enforcing agencies might penalize them for misclassifying you as an independent contractor when you should have been classified as an employee.
They also get to experience a lot of dysfunctional business processes, strategic goofs, and managerial mishaps within the organizations they worked with. So if you ever need a valid second opinion or an outsider’s perspective, you’d sure get a ton of insights. Another good reason to hire a contractor is when you need that specific task done… for yesterday. Even though the best independent workers have a waitlist, it would take less time than hiring, onboarding, and training a full-time employee to handle this one pressing chore. “Employee” and “independent contractor” (aka a freelancer, gig worker, and side-hustler) are legal employment statuses, backed by respective labor laws and tax policies. Usually, an independent contractor is the way to go if you need a particular skill or service for a specific, isolated project or if the work isn’t related to your core business. For example, if you need someone to clean your office once a week or a customer has requested that you provide a particular type of cabinet in the kitchen you’re installing.
An often-overlooked disadvantage of being a 1099 worker is that there is no withholding of taxes by an employer. This means that unless you make quarterly estimated tax payments, you may end up owing a jaw-dropping amount of money every tax season or subject yourself to potential penalties. In recent years, a surge among millennials has led to an increase in technological, consulting and sales-related “freelancing” work. Entire businesses have arisen to provide these workers with flexibility in housing locations and coworking spaces in order to fulfill their move toward a different working lifestyle. Operating a company in today’s business environment means addressing a myriad of challenges that can sometimes threaten to overwhelm a business. Because of this, a full-time employee might do a better job than a contractor because they want to make a positive long-term impression on their employer.
Independent Contractor vs. Employee Chart
With Panther, hiring contractors in 150+ countries just takes a couple of clicks. Employees also reap benefits from being an employee, including paying less taxes, gaining benefits like health insurance and PTO, and the stability of a regular paycheck. An independent contractor is defined as a self-employed person providing services or goods to another party with the right to control how and when the work occurs. Instead of a steady, predictable paycheck, independent contractors can experience peaks and valleys in their earnings. Independent contractors are also known as 1099 workers, so named because those who hire them report to the IRS the payments the IC receives, on a form called IRS 1099. By transitioning from contractors to employees, I reduced my risk as a business owner by not having to worry whether the government considered them employees, which involved a myriad of rules and regulations.
- The rules for the above differ for employees and independent contractors.
- You don’t have to spend ages finding that one person with a laundry list of mismatched proficiencies.
- Engaging independent contractors offers companies tremendous flexibility and cost savings, but employers must ensure their workers are accurately classified—or risk the high costs of noncompliance.
- Employees, though, come with a lot of laws and regulations as the state and federal governments regulate salaries, overtime, and work rules.
- As technology changes, enabling an ever-increasing number of people to work remotely, the use of independent contractors is growing.
The work you need to be done may only require a short time and have a very defined beginning and end. It doesn’t make sense to take on the financial and time burdens of hiring and then firing an employee unless you anticipate having multiple similar projects with work that will go on indefinitely. Unless stated otherwise in a legal document like a contract, the company will not own the copyright to the contractor’s project or work. Meanwhile, hiring employees can give you authority over their work ethics and quality, pushing them to do their best. One advantage of having your employees is having control over them. When hiring an IC, you don’t have much control over the individual.
How to Evaluate Independent Contractors
The past year significantly changed how companies perform business. Work trends in the business industry have also evolved into a more technology-dependent dynamic. By hiring an independent contractor you open your business to more scrutiny by the government for improper designation. There can be severe penalties for https://quickbooks-payroll.org/ business owners who pay individuals who should be designated as employers as if they were independent contractors. An employee is a person who works in the services of another person under a contract of hire which the employer has the right to control the details of work performance and it’s usually long-term.
Employers like contractors because they can avoid paying for taxes and benefits, and that means those costs fall entirely on independent contractors. Contractors must withhold their own federal, state, and local taxes. Although independent contractors usually charge more, you’ll save on other expenses such as employee benefits and taxes. Here too, the type of annual tax return you file depends on the way you’ve structured your business. ICs who have formed a corporation file a separate corporate tax return. Independent contractors have their own business, so you aren’t able to have the same control with them in the way that you could an employee. They set their own schedule which means they determine when and where they are working.
Employees vs Contractors: What’s the difference and why your business should care
You become less involved in the day-to-day business of your company and gain people management skills as your business grows. 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. They want the security of a work they can call their second home and the long-term job, while feeling part of the group. Receive the lastest news about hybrid and distributed teams, international hiring, compliance and payroll.
$79 million in back wages to more than 100,000 workers who were determined to be employees, not Pros And Cons Of Being Or Hiring An Independent Contractor independent contractors. You need to make sure they’re available on your schedule, not theirs.
Therefore, it is integral to evaluate the benefits of hiring independent contractors for the corresponding firms before going ahead with the actual process, to prevent in-evident repercussions. Because employment laws and regulations vary significantly between U.S. states and world markets, HR, legal, and finance teams must carefully focus on the nuances between markets. Employers reduce liability by relying on global employment partners to engage, manage, and pay workers. Finding and vetting service providers, however, is its own time-consuming HR burden. Engaging independent contractors offers companies tremendous flexibility and cost savings, but employers must ensure their workers are accurately classified—or risk the high costs of noncompliance. Companies that work with independent contractors enjoy tremendous benefits—and take on sizable risks.
The decision to hire a worker as an employee or independent contractor is done on a case-by-case basis, but you should be aware that the IRS considers a worker to be an employee unless you can prove otherwise. This table summarizes the pros and cons of an independent contractor vs. employee.
The pros and cons of hiring independent contractors for your firm
Government authorities in the United States and throughout the world are constantly on the watch for companies that deliberately or unintentionally misclassify workers as independent contractors. Misclassifications place your company at risk for several fines, penalties, and back taxes. Is the worker’s contribution critical to the company’s daily operations? If you hired someone to complete a project in two weeks, you have an independent contractor. However, if you have a dedicated person who works for an extended period and is an essential part of your team, they should have employee status. Workforce360 Study, about 86% of independent contractors reported their level of job satisfaction to be good/excellent.
All of these rights mean that companies and their human resources departments spend quite a lot of time drafting procedures and shielding themselves from liability. One of the main reasons companies choose to hire independent contractors over employees is the cost that is saved based on the working relationship. Employers are not responsible for covering traditional benefits, such as health insurance, unemployment insurance, and others. On top of that, independent contractors are usually the ones responsible for taxes. An independent contractor is a person or entity performing services as a non-employee, which means they work for themselves.
What are the advantages of being a 1099 contractor?
This scenario forces the true question of the benefits and disadvantages of hiring an independent contractor. An independent contractor can be defined as a small entity or an individual who contributes towards performing professional services for other entities. Contractors are usually self-employed – they pay their own taxes and manage their health benefits along with other instances all by themselves.
Talk to a Lawyer
If your company needs specialized skills for a short-term project, hiring a remote freelancer or independent contractor may be more cost-effective. When conducting business in your country or abroad, you should always see through the rules, labor laws, and other regulations that might affect your hiring and employment processes. Be sure to be compliant with all of these rules, and do not forget to secure an independent contractor agreement to state your working relationship and expectations clearly. An ABC Test is used by employers to guide them in determining if a worker is considered an employee or an independent contractor in the government’s eyes. Since the law is evolving, various states have adopted the ABC test as law. In contrast, others use it only in specified situations, for instance, when determining if one is legible for unemployment insurance. Independent contractors have to market and sell their services since they run their own business.