Hiring Independent Contractors

If the time has come to hire additional people to complete a job, you may be considering adding another name to your employee payroll software. But before you begin the hiring process, you may want to consider whether you need a full-time employee or an independent contractor.

What is an independent contractor?

Independent contractors (ICs) are workers who are considered to be in business for themselves. They may use a number of different terms to describe their employment situation, such as freelancers, consultants, self-employed workers or entrepreneurs. Regardless of the name they use, there is one important thing that a small business owner should keep in mind: ICs don't have the same legal status as employees.

The legal issues

When deciding whether to add a full-time staff member to your employee payroll software or opt for an IC, remember that independent contractors are treated differently from a tax standpoint than employees. With ICs, employers pay fewer taxes, an aspect that may appear very attractive to a small business owner.

However, you should know that if you wrongly miscategorize an employee as an independent contractor, you will be required to pay hefty fees, as well as reimbursing them for wages that should have been paid under the Fair Labor Standards Act. You will also have to pay the government all of the back taxes that were due on a federal and state level, as well as Social Security, Medicare and unemployment.

Employee vs. independent contractor

The IRS provides three categories that help business owners determine whether their workers are employees or independent contractors. However, you may want to contact your accountant or lawyer for more information.

Behavioral. How much control does the worker have over how they do their job? Employees are generally controlled by their employers in terms of when, where and how they work, what equipment they use, and what training needs to be completed to do the job. ICs bring their own tools, set their own hours and generally decide what method they use to complete a task.

Financial. If your business controls how a worker is paid, whether expenses are reimbursed and whether they can seek out business opportunities, they are likely to be an employee rather than a contractor. ICs can advertise freely, take on multiple clients, and set their own fees.

Type of relationship. If the job done by the worker is a key aspect of the business and it is expected the relationship will continue indefinitely, they are probably an employee. Alternatively, businesses that hire ICs expect the relationship will end when a job is completed.

Why hire an independent contractor?

Cost savings. This may be one of the most compelling reasons to hire an IC, as long as the position meets all of the criteria set out by the IRS. When you hire a contractor, you don't have to pay for employee benefits, office space, equipment, insurance or payroll taxes.

Reduced liability. With a contractor, you are not as vulnerable to being suit for job discrimination or wrongful termination.

Flexible workforce. Using ICs helps keep the workforce recorded by your employee payroll software lean and efficient. You can take on a contractor exactly when you need them, and then arrange to let them go when the job is complete. This type of arrangement can be particularly beneficial for businesses that have workloads that ebb and flow.

Access to highly skilled workers. When hiring a contractor, you can choose from among those workers who are most skilled in a given area. This also means training is likely to be minimal and the contractor can start producing and contributing immediately.

Risks of hiring an independent contractor

Less control. Contractors are generally in control of when and how they complete the work you hire them to do, which means you can't always call the shots. Business owners who want to closely manage their workers should probably opt for a full-time employee.

Multiple time commitments. Because ICs are in business for themselves, they are likely to have more than one project going on at once. This means your job may not always be their priority.

Workforce disruption. When you take on a temporary contract worker, there is the understanding they will depart when the work in complete. This means your workforce is constantly changing, which can potentially be disruptive to a small business.

Potential for higher fees. Although hiring ICs generally saves a business money, contractors with specialized skills may charge higher fees than you would pay an employee to do the equivalent job.