Employee -VS- Independent Contractor
Many small business owners face the dilemma of adding employees to their payroll versus contracting the job with an outside source. It is an important decision, and one which should be made only after weighing all of the factors on both sides. Darrell Zahorsky wrote a good article posing the pros and cons of each decision. David is a small business expert, author, speaker and Web editor whose work has been recognized in Harvard Business Working Knowledge, Fortune Innovation Blog, and other media. He is the author of an upcoming book on Starting a Small Business, published by Adams Media. Additionally, he works on assignment for Research In Motion, the makers of the popular BlackBerry smartphone. Here is some of what he says about the employee-contractor dilemma:
It is a dilemma you will face at some point during the life of your small business. The company is growing nicely but there is only so much you can do. Adding to your human resources can result in additional revenue and less chaos in your business life. Should you hire a new employee or an independent contractor?
Pros of Hiring An Independent Contractor
–Reduced Overhead: The attraction of hiring an independent contractor is the reduced costs in: expenses, payroll, benefits, and other overhead. Lower overhead means less stress to bring in new business revenue to cover costs.
–No Health Benefits: This one deserves separate mention. A burden on small business is the uncontrollable costs of employee health benefits. The average total cost of health benefits for U.S. employees was $6,215 in 2003, according to the Mercer 2003 National Survey of Employer Sponsored Health Plans.
–Work On Demand: Hiring an independent offers flexibility to the changing work demands of your company. You have the ability to take added opportunities as they arise, and during slow periods, have greater cost control. Your contract workforce often comes fully trained and highly specialized.
Pros of Hiring An Employee
–Dedicated Loyalty: Making the commitment to hire an employee can result in having an individual with stronger loyalty than an independent. Added loyalty can result in more productivity. Your loyal staff will be ready to take on additional roles to help your company grow.
–Multiple Roles: Staff in small organizations will often perform a variety of roles. This provides various learning opportunities for staff and a flexible, diverse workforce for the company.
–Improved Work Flow: With a steady stream of business, having an employee can be much easier to coordinate projects. Trying to juggle multiple freelancers to meet project deadlines can be a challenge.
Cons of Hiring An Employee
–Added Responsibility: The burden of your small business providing for your family becomes even greater as you have to make payroll for your staff and help them provide for their families.
–Extra Overhead: Not only are there the costs of employee benefits and payroll to consider, do not forget that your tiny home business or small office will probably have to move to a bigger space, sign a lease, and purchase equipment.
–Becoming A Manager: As your small business grows in staff, you become less involved in practicing your trade and more involved in people management issues. Your company will be exposed to worker-related lawsuits. Independents will often require less management due to more motivation from being self-employed.
Cons of Hiring An Independent Contractor
–Lack of Control: Part of what makes a contractor independent is their ability to choose the control over the work performed. Contractors may have additional projects and may have less commitment than an employee.
–No Fixed Rates: Your small business may find the perfect independent contractor to work with but the rates charged can vary by project and overall market demand. With an employee you can usually set the pay rate until the next review date.
–Misclassification Penalty: If you make an error in classifying an employee as an independent contractor, you will be liable for employment tax, interest, and a penalty. Use caution and keep current with the legalities.
Independent Contractor Determination Rules
Various tests exist for determining employee vs. independent contractor status. The once common “20 Common Law Factors Test” of the IRS, has been replaced by a new category test. This test examines the worker employer relation in three areas:
1. Behavioral control covers the amount of control the employer has over the worker in terms of where, when, and how the job is done, among other factors.
2. Financial control dictates how much control the company has over a worker’s pay, business expenses, and facility investment.
3. Relationship type is based on written agreements, employee benefits, and length of relationship between the company and worker.
For IRS help with classifying your workers, you can file Form SS-8, “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.”
Meeting the IRS test is not the only hurdle to determine independent contractor status.
Fair Labor Standards Act (FLSA) covers several criteria including if the service requires special skills.
If you do decide to go the independent contractor route, then develop a specific contractor agreement and make certain the contractor is insured to reduce your potential risks. Hiring an independent contractor can be the right choice for small companies not yet ready to make the leap to having a full staff.
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