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Hiring Pros & Cons: Employee vs. Independent Contractor

Employee vs. Independent Contractor

Small business owners have many decisions to make regarding how their companies are run; whether to lease or buy a building, how to manage accounting functions, and human resource management just to name a few. One of the biggest decisions to be made is whether they will hire employees or use subcontracted professionals to manage workflow. 

As with almost every decision, there are both pros and cons to each option. In this article, we will share some of the things you must consider during this important business decision.

Advantages of Hiring an Employee

  • Employees can sometimes take on multiple roles within your business.
  • Both workflow and project management are often more effective with an employee.
  • Employees will have a 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 which they both report and manage.
  • With employees, your costs can be fixed to some degree. Rates for independent contractors will vary depending on market demands.

Advantage of Using an Independent Contractor

  • There are no health benefits that you must pay to a contractor. Health costs can add over $5,000 annually to your per-employee cost.
  • You may focus your budget more on specific tasks or projects.
  • Ability to have work completed on demand. Many small businesses may have seasonal needs or business workflow that better suits 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 as well as more extensive training, giving you the same advantages as larger businesses.

Other Considerations

As you consider this topic, you must remember to think through the applicable tax implications as well as legal issues. We recommend you consult with a professional for specific information on legal implications. 

A few final thoughts on this topic:

  • If you hire an independent contractor just to get around benefits and legal issues and the contractor works exclusively for your firm, authorities may not consider them to be truly independent.
  • Under Workers’ Compensation Laws, if you control both 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 that outlines all legal issues.
  • The IRS uses 20 factors to determine if a worker is an employee or an independent contractor. However, this issue is largely up to their interpretation of the situation.

As the needs of your business change, you may find that your hiring structure must also evolve. Our team of professionals is ready to advise you on a hiring process that works for your unique business needs.

LUXA Enterprises specializes in HR services, outsource accounting, bookkeeping, and payroll services. We match up with ideal candidates for services by allowing small to midsize businesses to increase focus on their growth through outsourcing. If you want to know how we can help you, contact us today!

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