A guide on what’s more cost-effective, as well as the pros and cons for hiring practices.
If you are wondering whether to hire a contractor or an employee for your business, there are a number of factors to consider. Entrepreneurs looking to expand their businesses should be aware of the pros and cons when hiring different types of workers. There are significant differences between independent contractors and employees, and it’s important to know which type of worker will fit best with your business.
What are the differences between an independent contractor and an employee?
As defined by Business News Daily, an employee is a worker that is listed on the business’ payroll and receives regular wages and benefits. An employee is expected to work a dedicated full or part-time position, and expected to remain loyal to the company and follow organization guidelines.
An independent contractor is self-employed and has full autonomy and flexibility over the work they complete. Contractors are not listed on a company’s payroll, they do not receive benefits, and they have the freedom to cut ties with the company whenever they choose (or as stated in the agreement between the contractor and the business). Contractors can work on a per project basis, or for a designated short or long-term period.
Pilot outlined some of the biggest differences between the two types of workers:
- Taxes and Benefits
- Contractors receive no benefits and does not have to pay payroll taxes.
- Employees require payroll taxes including social security, medicare, and unemployment. Employee benefits can include health insurance, retirement fund matching, paid time off, disability, workers’ compensation, overtime pay, and other perks.
- Cost
- Contractors work on an hourly rate, or their fee is project-based.
- Employees require salary, regular bonuses, and job training.
- Loyalty
- Contractors are not expected to foster a long-term relationship with the business.
- Employees are expected to be more invested in the business and are interested in a more long-term future with the company.
- Degree of Control
- Contractors provide results with little input from the business.
- Employees provide results with the business restricting how, when, and where the work is performed.
- Tax Reporting
- Contractors require W-9 and 1099-MISC forms to file their own taxes.
- Employees require W-2 and W-4 forms to file their own taxes. Employers contribute to payroll taxes and potentially some other benefits.
Is it more cost-effective to hire a contractor or an employee?
According to The Balance, in December 2021 employee compensation was costing businesses $40.35 per hour on average. Though the cost of hiring a contractor may be less in the long term, contractors have higher hourly rates to cover their self-employment taxes. Employers can expect a contractor’s rate to be 50 percent to 70 percent more than what they pay a permanent employee.
Remember, hiring an employee comes with more expenses than just their salary. Pilot shared the example if you hire a new employee for $125,000 per year, you can expect to pay up to $175,000 after including taxes and benefits.
How different is the working relationship between a business and a contractor or an employee?
Depending on the company culture and the type of work being done by the contractor or employee, the working relationship with the company can go a number of ways.
Business News Daily points out that employees are typically thoroughly vetted by the company through a series of interviews and face-to-face interactions. Employees are invested in the company and plan to stay in their position long-term.
Contractors can be hired with minimal communication with the company if the project required needs little supervision or direction. A contractor that has good experiences working with a company may stay in touch for repeat work or longer-term projects. Schedule flexibility may be a barrier though, which can also lead to inconsistency.
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