For small business owners, a common question that comes along (especially as your business grows) is figuring out what kind of workers would be best for your venture: contractors or employees.
Today, we’ll be going over some of the crucial differences between contractors and employees – and how to decide which is the right fit for your business’ goals. Tax classifications, scheduling, and benefits are among a few of the distinctions between contractors and employees to consider when making your decision.
Let’s get into more of the specifics of this question.
What Are Independent Contractors?
Technically, independent contractors are those workers who possess greater control over the results of their work, and are subject to the self-employment tax. However, whether a worker is a contractor, or an employee still must be individually determined based on a few factors:
- Relationship type: Is the relationship continuous; does it involve benefits?
- Financial: Who has control over payment, reimbursement, etc.?
- Behavioral: Who has control over when/where/how the contracted work is done?
This is not an exhaustive list of questions to consider when determining if someone should be a contractor or an employee, but these are some of the most important items to take into account when making the distinction.
In sum, an independent contractor is a worker who has more control over their schedule, the work that they do, how they are paid, and who they choose to work for. And, though contractors can definitely “work for” specific companies, even on a long-term basis, they are still not officially on that company’s payroll and thus are not employees.
One way of thinking about it is that contractors are more of an outside resource than an internal employee, or that employer-contractor relationships entail arguably more equal footing than an employer-employee relationship might have in terms of controlling the work that is done.
What Are Employees?
The next classification of worker we’ll be going over today is likely the most familiar one in the modern workforce: the employee.
Put simply, whether a worker is an employee or not comes down to who has ultimate control over the work that is being done. If an employer has final say on the nature of the work an employee performs for them, then that worker is certainly an employee.
Of course, there are more specifications that make a worker an employee aside from control over their work, including:
- Tax classifications (W-2 employees)
- Benefits like health insurance, sick and vacation time
- Potential for more loyalty and/or longevity
Hiring traditional employees is a common choice for businesses who have the overhead and capability to afford the necessary expenses that come with having this kind of worker. Still, that doesn’t mean having employees rather than contractors is always the best choice for any business.
The differences between contractors and employees directly coincide with the benefits that each type can bring your business, which we’ll get into in the last section of this article. First, though, let’s go over those key differences.
Key Differences Between Contractors and Employees
There are five main categories that set contractors and employees apart from each other. These are: tax class, scheduling, benefits, hiring processes, and flexibility.
- Tax class: Employees are usually classified as W-2 workers for tax purposes, while contractors will need a Form-1099 from you to complete their taxes. In addition, employers have responsibility over a portion of employees’ taxes (like for Social Security) as opposed to independent contractors being responsible for their own taxes entirely.
- Scheduling: This has to do with that keyword “control” that we keep mentioning. A common characteristic of working as an independent contractor is the ability to have control over the hours that you work. For example, aside from things like scheduled meetings, contractors usually have jurisdiction over when they complete their work.
- Benefits: While regular employees typically expect to be provided with benefits like paid time off or health insurance when they work for a company, businesses are under no obligation to provide these things for independent contractors.
- Hiring Processes: Sometimes, contractors are hired for short-term projects that need to be completed rather than for the purpose of establishing a long-term working relationship. Employees, however, are usually hired on for the intent of retaining them for an extended period of time.
- Flexibility: This goes back to the idea of control over one’s work, but to take it a step further, being a contractor rather than an employee provides a worker with even more flexibility than just scheduling. Contractors are able to work for multiple entities at the same time, have less expectations of loyalty to one entity, and have overall more agency over the kind of work that they choose to pursue. All that to say, the word “independent” is typically paired with “contractor” for a tangible reason.
It might seem like the various benefits involved with choosing to work as an employee versus a contractor are only helpful for those individuals completing the work, and not for the entity which supplies the work. But having the option to hire either contractors or employees is also in place for the benefit of companies and employers.
Let’s go over some of the most important things to consider when deciding whether to hire contractors or employees for your business.
Contractors or Employees: The Right Choice for Your Business
You know your business and its needs better than anyone else, so the decision to hire either employees or contractors is ultimately up to you. But you should consider the following factors when deciding which worker type to hire.
- Type of work needed: For some businesses, employers find themselves with work that needs to be done that doesn’t fit the typical parameters that require hiring a traditional employee. This can be a great opportunity to hire a project-based independent contractor.
- Example: A marketing agency needs content calendars completed at a certain time of month but doesn’t have enough work of that sort to constitute the need for a consistent employee, even on a part-time basis. An independent contractor who can complete the project for a flat-rate wage is best in this situation.
- Cost legroom: Smaller businesses, especially, may run into problems with having enough overhead revenue to be able to support the costs of having traditional employees. Taking out tax responsibility, the need for covering this worker in your payroll, or providing benefits will reduce the amount of funds you would have had to put into hiring employees when you decide to hire a contractor instead.
- Keep in mind: Although cutting costs is a common goal for many businesses, and hiring contractors is a seemingly easy way to do that, it still isn’t always the right choice for every venture.
- Growth goals: Desire for business growth is crucial to consider when deciding what kind of workers to hire. While contractors can help with specialized needs and reduce overhead costs, having traditional employees is usually a better option if you want to allow your people to truly “grow with you.” Still, this all depends on your overall business goals and how much support you’re looking for from the people you work with. As with anything else, balancing your priorities is essential.
- Importance of flexibility: The very definition of an independent contractor implies that this type of worker has a great degree of flexibility. If your business goals are rigid and require a lot of commitment that would typically come from an employee rather than a contractor, then employees may be your best bet.
- Importance of loyalty: On the other hand, employees are typically expected to identify more with their employer than a contractor would, and thus be more loyal to them. If this is something that is vital to your business goals, then employees would be a better option. However, if you’re just looking for specialized support, this is not to say that contractors can’t be trustworthy or loyal while also providing the work that you need.
Overall, deciding whether to hire employees or contractors is a very individualized process. It’s vital to take a long look at your business’ goals and abilities, and then consider whether the specifications of having employees or contractors would better suit your needs.
If specialized work is what you need, and flexibility is something you can provide, then contractors may be a good way to go. If you’re looking to develop a consistent workforce and have the overhead to pay what it costs to retain employees, then this traditional approach could work for you.
At KSR, we’ve got experience going through the pros and cons of contractors versus employees. If you have questions on how to approach this difficult decision, reach out to us! We’re happy to share what we’ve learned.
