A company needs people to help it run properly aside from the business owners. An owner might decide to hire employees or work with independent contractors. There are benefits to using both employees and independent contractors.
What is the Difference?
There are differences in how employees and contractors work and how they get paid. The basic differences are:
- Employee: Your company will withhold income tax, Social Security, and Medicare from wages paid to your employees. Your business must also make FICA tax payments. Employees are normally paid hourly, salary or commission.
- Independent Contractor: Your company will not withhold federal or state income taxes for independent contractors. Your business is not required to make payments for FICA taxes. Independent contractors must pay their own income taxes, along with income tax on earnings.
If you are wondering which one is better, true answer is both. There are reasons to use independent contractors and great benefits to working with employees.
Pro and Cons – Employees
There are pros and cons to hiring and managing an employee within your company including:
- Paying an employee, a salary or hourly wage, is often less expensive because there is job security.
- It is easier to assign tasks when you already have employees with the skills to complete them.
- Employees often take pride in their full-time work because it is a large part of their life, so they put the needs of your company high on their priority list unlike a contractor.
- Since you spend more time with your employees it’s easier to get to know them and trust them with your business needs.
- There is a lower turnover rate for employees so they get to know the ins and outs of your company and can help you grow.
- You must supply the equipment and materials your employee uses to complete their work such as phones, computers, software.
- Full time employees expect benefits such as health care, paid time off, sick days, raises and bonuses.
- There is payroll paperwork and HR requirements that take legal knowledge as to not break any rules.
- You must consistently provide an employee with work and pay even when business slows down and your company isn’t making as much money.
- Employees require training and don’t always come fully equipped with the skills to complete the tasks you need done.
Pro and Cons – Independent Contractors
Although every company needs employees there are also benefits to expanding your team through independent contractors such as:
- Your company can save money because you don’t have to provide any benefits to independent contractors such as health insurance or PTO.
- It is easier to end your relationship with a contractor than it is with an employee. If business slows down you have more freedom in ending the business relationship.
- You can hire a contractor with specialized skills that are specific to the task at hand if you do not have an employee with those skills.
- Contractors don’t require much training since most independent contractors have a specific skill set and have years of experience.
- No need to complete any legal paperwork for contractors, in most cases.
- They don’t have a sense of company loyalty and will not help promote your brand.
- There are no fixed rates so pricing can vary depending on the project, so it isn’t as easy to budget for as an employee salary.
- You don’t have as much control over how a task is done.
- There are higher turnover rates on contractors than there is with employees.
- You cannot determine a contractor’s work hours unlike an employee.
Why You Should Use Both
There are pros and cons to both employees and independent contractors. While you may personally feel one is better than the other there are reasons both are important in building your company. For example, if you have 20-40 hours of work that needs to be done that varies in projects and tasks then it might be easier to have an employee to assure you have someone on the clock full-time/part-time. If you have a specialized project that takes less than 20 hours per week, it is beneficial to use an independent contractor and is important to know when to outsource.
Your company should be built with a healthy mix of both employees and contractors depending on your current business needs. You can use the pros and cons from above to determine which type of worker makes more sense for the project at hand.
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What is your experience with hiring an employee vs hiring an independent contractor? Leave a comment below!