While your small business has grown steadily over the past few years, you now find that you cannot keep up with all of the demands of your business. So you decide to bring in some help to relieve some of your stress and maybe increase revenue. However, you are now faced with the decision of whether you should hire an employee or an independent contractor. This is an important business decision because if the wrong decision is made, it can be very costly.
Pros of Hiring an Independent Contractor
Hiring an independent contractor rather than an employee can greatly reduce the costs to your company in three different areas: payroll preparation, payroll taxes and employee benefits.
- Payroll preparation is not necessary for an independent contractor as it can be as simple as writing a check for the hours worked at a specified rate.
- Companies are not required to pay any payroll taxes, Social Security or Medicare for independent contractors. The independent contractor is responsible for paying all payroll taxes individually.
- Employee benefits are not offered to independent contractors, which can save money as some benefit packages can be expensive to set up and maintain.
Independent contractors generally work on demand, offering flexibility as your company grows and changes. As a result of being self-employed, they often require less management and are self-motivated. Independent contractors also do not require much if any training, as they are already trained and specialized in their field.
Cons of Hiring an Independent Contractor
By hiring independent contractors, you reduce your control over projects. Most independent contractors will have multiple employers at one time and therefore could be less committed to your project than an employee. Using several different independent contractors can cause problems when meeting deadlines.
You must use extreme caution when you decide to hire an independent contractor. If you misclassify an employee as an independent contractor, you will be liable for employment tax, interest and a penalty.
Pros of Hiring an Employee
Making a long-term commitment to hire an employee can prove beneficial as the employee will more likely have loyalty to your company than an independent contractor.
Employees can perform multiple roles in small businesses. By cross-training an employee to do several jobs, this creates flexibility and learning opportunities for the staff.
Employees who work together on a day-to-day basis will be able to coordinate projects to meet specific deadlines and improve work flow.
Cons of Hiring an Employee
Hiring an employee increases your responsibility as a small-business owner, as well as increases your costs. You will now be responsible for employee benefits, payroll taxes and payroll preparation costs. If you hire too many employees, you may become more involved in managing your workforce and less involved in practicing your trade.
Another major draw back to consider is the increased cost of the business’ overhead. If you increase your number of employees, your home business or small office may require more space and equipment to accommodate them.
Determining Whether a New Hire Qualifies as an Independent Contractor
The IRS looks at three different categories to determine if a worker qualifies as an independent contractor: behavior control, financial control, and relationship type.
- Behavioral control includes the control the employer holds over the worker concerning when, where and how the job is completed. Independent contractors are generally allowed to complete the job in their own time, using their own methods and tools. They may be allowed to assign the work to others, thereby not required to complete it personally. However, they agree to complete a specific job and should be required to perform satisfactory work.
- Financial control is how much control the company has over a worker’s pay and business expenses. An independent contractor is liable for his own business, including travel expenses, whereas the employer generally pays these expenses for employees.
- Relationship type is based on written agreements, what employee benefits are provided, and the length of the relationship between the company and the worker. Generally, an independent contractor is hired for one job at a time and does not have a continuous relationship with the company. Independent contractors can work for a number of clients at the same time.
For more information on this topic, contact Henssler Financial at 770-429-9166 or experts@henssler.com.
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