The differences between independent contractors and employees can be subtle and hard to distinguish, but it’s important to know the difference in order to safeguard the company and avoid costly legal issues. Having a basic understanding of the differences can help employers determine what the best choice is for the organization. This decision will affect how the organization will withhold taxes, the worker’s relationship with the company and an array of other issues.

Contractor Traits

• Contractors will fill out a W-9 and receive a 1099 at the end of the year.
• Contractors are not employees of the organization; they operate under their own business name.
• They will often have their own employees.
• Because they are their own business entity, they will usually have their own business checking accounts.
• Contractors will turn in invoices for work completed and are paid based off of those invoices.
• They will generally have more than one client.
• Contractors are expected to have their own tools to complete the job, whether that be heavy equipment, or a laptop.
• They will keep their own business and financial records.

The Benefits of Using Contractors

With rising healthcare costs businesses are scrambling to find ways to save money. More businesses are turning to contractors to get the work done. Hiring contractors saves the company money in labor and equipment costs. Additionally, contractors are responsible for their own taxes; this amounts to large savings for the company. Contractors also save the company in liability risks. Because most of the costs associated with hiring and firing employees do not pertain to contractors, companies enjoy more flexibility in these areas.

The Downfalls to Using Contractors

Contractors set their own hours, and are therefore free to come and go as they please. Because they are a part of their own business, they set their own hours and ultimately decide whether or not they come to work without fear of losing employment. As their own business entity, there is less loyalty to the client. They won’t necessarily be there for the next project if they already have something else lined up. The nature of contractors is temporary.

Scale Computing Hires Contractors

CEO Jeff Ready is approaching hiring much in the same fashion as a lot of smaller businesses right now. He is reluctant to make solid hires because of fluctuating business. The recession and its after-effects has made a lot of employers gun shy when it comes to making new hires. Instead of committing to significant hiring, Ready is using independent contractors to build a presences at trade shows, for PR, accounting, finance and a lot of other functions within the company. Ready said,

“You have to be very prudent in how you hire. What I’m doing is trying to keep a smaller in-house contingent and supplement it with contractors based on the ebbs and flows of how much business we have.” 

For more information on how Scale Computing uses contractors, check out this article from The Times. 

Employee Traits

• Employees fill out a W-4 and receive a W-2 at the end of the year.
• Their duties and tasks are controlled and dictated by a manager or supervisor in the company.
• Employees usually require training in order to begin and continue their work.
• They usually only work for one employer.
• They are paid hourly or salary.
• Tools and equipment required to do their job are provided by the organization.

The Benefits of Hiring Employees

Employee’s duties and hours are dictated by the employer. This means that employees are far more controlled by the organization than contractors. Employees have set hours and expectations that if not met, can end in termination. Employees have a far more permanent relationship with the organization, fostering engagement and loyalty. The nature of employees is to have more stake in the overall success of the company.

The Downfalls to Hiring Employees

Employees cost the company far more than contractors do, as they are responsible for paying taxes on them and carrying higher liability risk. There is generally more responsibility involved on behalf of the company for employees than for contractors.

Employers must pay state and federal unemployment tax, social security tax and workers compensation/disability on each employee; these costs don’t apply to contractors.

The decision to hire a contractor or an employee isn’t always cut and dry. Figuring out what works for the company is a matter of finances, legality and degree of permanency. Determining whether the company needs an independent contractor or an employee largely depends on the amount of control imposed by the employer. As employers make the decision between contractors and employees, it is important to keep in mind that the position, duties and supervision required can be molded to fit the needs of the organization. 

photo credit: Victor1558 via photopin cc