If you’re thinking about hiring new staff ahead of the holiday rush, or you’re reworking existing staff, you’ve likely run into the issue of deciding whether you should treat them as a contractor or an employee. How do you choose what’s best for your business?
The difference between a contractor and an employee
First, it’s important to understand exactly what the differences are between contractors and employees.
A contractor—who may also be known as a freelancer or a contract worker—is an independent worker hired to do a specific job or task. They may work for multiple companies simultaneously. They generally have more control over when and how they work. Unlike employees, contractors aren’t officially on the payroll and don’t receive a W-2 or benefits like a 401k or insurance. Instead, they are considered self-employed and may have their own business, such as an LLC or sole proprietorship. Depending on their contract, they may be paid for their time or by project completion—such as a freelance writer being paid per article.
An employee, on the other hand, is someone who performs services an employer controls and is paid an hourly wage or a salary. Employees also have certain rights, such as protection from discrimination and entitlement to leave under the Family Medical Leave Act.
How to determine if someone is a contractor or an employee
If you’re looking at hiring someone and aren’t sure whether to classify them as a contractor or an employee, there are some things to consider. Keep in mind, there are consequences for misclassification, including penalties, fines and possible legal trouble, so you need to get this right.
The IRS looks at factors such as:
- How is the worker paid? Is it on a regular schedule such as weekly, or is it when a project is complete?
- How does the worker complete their tasks? Are they in an office or working from home? Do they use their own tools and technology? Do they have set hours?
- Is the work temporary or ongoing? Is the worker contributing to projects that have set end points, or is there an indefinite length to their work with you?
They may also consider things such as travel, as employers generally pay for work-related travel for employees, and company training, not commonly provided to a contractor.
The pros and cons
Contractors offer business owners more flexibility than they can typically get with employees. A business can hire contractors to do a specific task or project. Contractors are also often more affordable than employees, especially as the employer is not required to offer benefits or pay payroll taxes. Businesses may also be able to save time and money on training, office space, and providing tools or technology by hiring a contractor.
However, you’ll have less control over how and when the work is done. They won’t be on your payroll, so you’ll have to account for their pay differently and you may lose out on some tax benefits. And once their contract ends, they may not be available the next time you need help.
Hiring an employee may be more challenging and expensive with training, payroll taxes, and benefits, but ideally, there is a greater sense of loyalty. Unlike a contractor who may be working for other companies and is thinking about getting their next gig, a well-treated employee can become a valuable, trusted member of your team long term.
What’s best for my business?
Whether contractors or employees are the right approach for your business will depend on factors like the type of work you need and your budget. If you’re still not sure what’s right for you or want to avoid costly misclassification mistakes, Padgett’s nationwide network of CPAs and EAs are here to help! With our decades of tax, payroll and accounting experience, we can help you find the solution your business needs. Find a location near you today!