Pros and Cons of Working as an Independent Contractor

Independent contractors are able to hire or outsource their own assistants/subcontractors for work at their own discretion. As previously mentioned, independent contractors generally enjoy a higher level of freedom in terms of working hours, work methods, and many other aspects of work. Suppose a worker receives relatively extensive evaluations of work performance, high degrees of instruction, and significant amounts of training. In that case, the IRS generally assumes a worker to be an employee rather than an independent contractor.

Recruiting and interviewing are time-consuming, especially if you need to familiarize yourself with the hiring process. For example, the employer must carry workers’ compensation insurance by having employees in almost every state. Most states require an employer to carry workers’ compensation insurance if they have at least one employee. We’ve got a whole post on the differences between full-time employees vs contractors here. But today, we’re focused more on the pros and cons of each rather than their definitions.

Hiring Independent Contractors

This is helpful if you need more time when you get overworked or stretched too thin. Generally speaking, employers own the intellectual property their employees create during the course of employment. Nevertheless, employers do not automatically own all intellectual property created during an employee’s employment.

• Usually, companies hire their staff with the intention of keeping them for a long time.
• With the help of an employee, you may also complete more tasks in less time, giving you more time to focus on other elements of your business.
• Employees and employers must know these fundamental distinctions to negotiate the intricate web of employment relationships.
• Independent contractors are self-employed and fund their own perks packages.
• Of course, if something happens on your client’s property, your client may not differentiate between your employee and someone you’ve subcontracted for a specific task.

Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. A court or government agency would be likely to consider this employer justified in classifying this event planner as an independent contractor. Ultimately, the decision between independent contractor and employee status is highly individualized.

What are the consequences of misclassifying an employee?

Prior to entering the practice of law, Greg was a Trust officer for one of the largest U.S. Banks, an adjunct professor of finance at Meredith College and a Series 7 licensed financial advisor. Greg is currently the owner of The Law Office of Gregory S. Davis, PLLC (gsdavislaw.com) focusing on Estate Planning, Real Estate and Business Law.

Employees, also called common-law employees, earn regularly scheduled paychecks. Their employer must withhold a portion of employees’ paychecks for Federal Insurance Contribution Act (FICA) taxes, state income tax, and federal income tax. Businesses hire employees to perform services for either hourly or salaried compensation. They’re usually required to work within set hours, and their employer can dictate how and where they execute their duties. This might be on a temporary basis, for a specific project, or for certain duties on an ad hoc basis. Being an independent contractor can be rewarding since it offers you the ability to be your own boss, choose which clients to work for, and allow you to work from home.

Why is it important to distinguish between an employee and an independent contractor?

Both the federal government and your state regulate the payment of wages or salaries, overtime, and other work rules. Businesses also pay employer-paid payroll taxes, such as federal unemployment taxes (FUTA), state unemployment taxes (SUTA), and the employer portion of FICA taxes. In rare circumstances, you might encounter a contractor who requires backup withholding, in which case you must withhold and remit to the IRS 24% of the contractor’s fee. The IRS requires backup withholding when an individual either doesn’t report income, underreports income, or fails to provide a correct taxpayer identification number (TIN) to a previous client. Employees develop an employer-employee relationship with a company, and full-time employees are likely to dedicate all working hours to the company. As a workforce, you expect them to perform all work that is essential to the business.

• Employers too often rely on handshake deals to secure contractor services.
• As previously mentioned, independent contractors generally enjoy a higher level of freedom in terms of working hours, work methods, and many other aspects of work.
• If you have questions about classifying workers or other employment law issues, lean on a team of experienced Denver business lawyers like those at Contiguglia Law for assistance.
• Behavioral control is all about how much influence a business has over the services the worker provides.
• Employers entice top talent with company-provided perks, such as paid vacation and retirement contribution plans.

The employer is responsible to deduct federal and state taxes as well as Social Security and Medicare taxes from their income. The employer is also responsible to pay half of the Social Security and Medicare taxes. Independent contractors
are professionals or workers in a trade or business that offer their expertise or service to the general public.

Indeed, full-time employees can be a driving force behind scaling your business. There is a great deal of difference between an employee and an independent contractor in terms of compliance. I never knew how difficult it independent contractor vs employee was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control.

• In the end, it all comes down to the work the worker performs and how you manage the work they perform.
• Contractors are usually hired to provide a scoped service or solve a specific problem, rather than handle a line of duties an in-house employee in the same position would.
• While such use can provide a lot of benefits, it also presents a lot of risks and small business lawyers are at the forefront of helping companies mitigate these risks.
• Businesses hire employees to perform services for either hourly or salaried compensation.
• Employees, on the other hand, are individuals who work for an employer and are considered employees under the law.

Brent has been in practice since 2007 and been the principal attorney and owner of The Walker Firm, LLC since 2014. Brent focuses on providing an array of general counsel services to individuals and companies in a variety of industries. So, it’s always better to get certainty to avoid any of the consequences of misclassification.

The Pros and Cons of Contractors vs. Employees

As a full-time staff member, you enjoy regular work hours, see the same colleagues each day, and answer to the same manager. And, while your work may be project-based, your salary doesn’t depend on how many projects you complete. Your tasks are also likely oriented toward your company’s long-term strategic plan. Each January, businesses issue Form https://www.bookstime.com/ W-2 to each employee and the Social Security Administration (SSA) to summarize wages and tax withholding. When a business engages an independent contractor, they usually put together a contract to establish the fee and the desired work output. Independent contractors generally have the flexibility to decide how, where, and when they work.

Businesses must withhold and pay income taxes, social security contributions (plus any gov-mandated extras) for employees. But you generally don’t have to cover any of the above for payments made to independent contractors. For many business owners, the employee v independent contractor decision comes down to the type of relationship you want to create. You put in a lot of responsibility and you get back loyalty and control. Having an employee means you have to cover certain employment benefits and may not be able to let go of your employee whenever you want. On the other hand, you get to decide where, when, and how your worker does the job, and can even train them to do it a certain way.

You should always hire an independent contractor with a contract in place. Employers too often rely on handshake deals to secure contractor services. Furthermore, contractors are typically liable for their own taxes and benefits, which can save your company money. Instead of hiring a full-time employee, a business launching a new product line could choose to work with a contractor with experience in product development.