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What are the Advantages/Disadvantages of Employees vs. Contractors?

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Question: What are the Advantages/Disadvantages of Employees vs. Contractors?

When you start a new business, you will invariably decide that you need help. Most small business owners start out by hiring outside contractors to do work for them, but at some point you may decide to hire an employee or two. This article discusses the advantages and disadvantages of hiring employees vs. independent contractors.

Answer:

Hiring Employees

An employee is a person who works in the service of another person under an express or implied contract of hire, under which the employer has the right to control the details of work performance (Black's Law Dictionary). When you hire an employee, you get the advantage of being able to completely control and direct that person's work during work time, to train the person in the way you want the job done, and to require that person to work only for you. You have few restrictions or limitations on what you can assign to the employee or about your ability to terminate the employee without paying out a contract.

On the other hand, employees come with a boat-load of laws and regulations attached to them. Both the federal government and your state regulate the payment of wages or salaries, overtime, and other work rules. You must also comply with payroll tax requirements, including paying half of the FICA taxes (Social Security and Medicare) for each employee, and collecting the other half from the employee. Other responsibilities include payment of unemployment insurance and worker's compensation insurance.

Hiring Independent Contractors
The advantages and disadvantages of independent contractors are the opposite of those for employees. You can assign duties to an independent contractor and impose a deadline and work product, but you cannot tell that person how to get the job done. An independent contractor can work for others, can often set his or her hours of work, and often provides his/her own tools.

On the other hand, you have few reporting or tax responsibilities for independent contractors. You must report his/her the amount you have paid each year for that person on a Form 1099-MISC, but you don't have to withhold or pay FICA taxes on these payments. The payroll responsibilities for an independent worker are significantly less than for an employee.

In conclusion, you should consider hiring an employee if:

  • The work needs to be done under your supervision
  • You want to control the hours of work and the tools and equipment used by the worker
  • If this is a long-term need (such as preparing products for shipping), and
  • If this work is essential to your business and not a peripheral job. For example, a marketing person is essential, while a cleaning crew may not be.

The decision to hire a worker as an employee or independent contractor is done on a case-by-case basis, but you should be aware that the IRS considers a worker to be an employee unless you can prove otherwise.

For More Information
Read more about the factors the IRS uses to determine if a worker is an employee or independent contractor (the "IRS 20-Factor Test".

Back to All About Employees vs. Independent Contractors

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