To Hire, or Not To Hire: Employee vs. Independent Contractor

To Hire, or Not To Hire: Employee vs. Independent Contractor

by Anneke Stender – VP, Family CFO 

You’re an ambitious small business owner with a steadily growing operation. Lately your human capital is spread thin – you and your small staff are getting overwhelmed. The imminent future: your growth is going to plateau and turn south. The easy fix: hire additional workers. The hard decision: employee or independent contractor?

In order to avoid a sticky IRS worker classification audit, be proactive in your hiring process. To help you understand what your business might need, I’ve developed a Pros and Cons list for hiring an employee or independent contractor. Misclassifying your workers has some hefty penalties, but is easy to prevent if you plan ahead. Here are the Pros and Cons to keep in mind, and help you hire correctly:

Employee: Pros

1. Loyalty = Productivity:

Making the commitment to hire an employee can result in having an individual with stronger loyalty than an independent contractor. Added loyalty can result in more productivity. Your loyal staff will be ready to take on additional roles to help your company grow.

2. Role Flexibility:

Staff in small organizations will often perform a variety of roles. This provides various learning opportunities for staff and flexible, diverse workforce for the company.

3. Improved Work Flow:

With a steady stream of business, having an employee can be much easier to coordinate projects. Trying to juggle multiple freelancers to meet project deadlines can be a challenge.

Employee: Cons

1. Added Responsibility:

The burden of your small business providing for your family becomes even greater as you have to make payroll for your staff and help them provide for their families.

2. Increased Overhead:

Not only are there the costs of employee benefits and payroll to consider, do not forget that your tiny home business or small office will probably have to move to a bigger space, sign a lease, and purchase equipment.

3. Becoming a Manager:

As your small business grows in staff, you become less involved in practicing your trade and more involved in people management issues. Your company will be exposed to worker-related lawsuits. Independents will often require less management due to more motivation from being self-employed.

Independent Contractor: Pros

1. No Health Benefits:

A burden on small business is the uncontrollable costs of employee health benefits. The average total cost of health benefits for U.S. employees was $9,562 in 2010, according to the Mercer 2010 National Survey of Employer Sponsored Health Plans.

2. Reduced Overhead:

The attraction of hiring an independent contractor is the reduced costs in: expenses, payroll, benefits and other overhead. Lower overhead means less stress to bring in new business revenue to cover costs.

3. Just-In-Time Worker:

Hiring an independent contractor offers flexibility to the changing work demands of your company. You have the ability to take added opportunities as they arise, and during slow periods, have greater cost control. Your contract workforce often comes fully trained and highly specialized.

Independent Contractor: Cons

1. Misclassification Penalties:

If you make an error in classifying an employee as an independent contractor, you will be liable for employment tax, interest, and a penalty. Use caution and keep current with the legalities.

2. Less Control:

Part of what makes a contractor independent is their ability to choose the control over the work performed. Contractors may have additional projects and may have less commitment than an employee.

3. No Fixed Rates:

Your small business may find the perfect independent contractor to work with but the rates charged can vary by project and overall market demand. With an employee you can usually set the pay rate until the next review date.

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