Employees and contractors—do they have anything in common? Not at all.
It’s the equivalent of stating Superman and Batman are the same people. While both are caped crusaders, Superman uses his superpowers to fight crime, while Batman depends on his intellect and intelligence.
Employees and contractors, too, have distinguishing features that set them apart. And you should be aware of them because hiring a contractor who should be an employee can have major ramifications.
RisePath provides some information regarding the differences between hiring an employee and hiring a contractor to help you decide which is best for your company right now.
What is the difference between employees and independent contractors?
They function differently.
A quick review of the definitions follows:
- Anyone who performs services for you… if you have control over what is done and how it is done. This is true even when the employee has complete autonomy. This means that even if you let someone to work with minimal supervision or monitoring, you’ll need to hire someone to instruct them what to do and how to accomplish it.
- The payer has the right to control or guide only the result of the work, not what will be done and how it will be done, according to an independent contractor. In other words, you can only control the end or delivery when you employ a contractor, not how the work is done.
If you employ a web developer to design a website, for example, the end result is the website. You have the option of ordering a six-page website with unicorns and rainbows. If the developer is an independent contractor, you can’t tell him or her to come to your office every Tuesday for three hours, use your computer, and follow a precise workflow.
You compensate them in numerous ways.
There are a few fundamental differences between paying a contractor and paying an employee.
Here are some factors to consider while paying an employee:
- Employers pay federal payroll taxes. These taxes cover a portion of the employee’s Social Security and Medicare benefits and amount to 7.65% of their wages.
- FUTA taxes are 6% of the first $7,000 in salary for each employee.
- If your state requires it, you must pay state unemployment insurance (SUI).
- State and municipal taxes if applicable.
Other expenditures linked with employee employment include:
- Packages of benefits
- Pay for overtime
- Insurance for workers’ compensation
Whoa! That’s a significant sum to spend on top of employee salary. Is there any other option? Contractors, to be sure.
Contractors are typically classed as self-employed or as employees of another company, such as an outside vendor, which means they are responsible for paying their own taxes. Unlike employees with whom you share the tax burden, you do not pay payroll taxes when you pay a contractor.
Sweet! So why would I ever employ someone?
Because employees and contractors are not interchangeable in the eyes of the IRS (and therefore in the eyes of state courts!). Each has its own legal classification, and if you hire someone as a contractor who should be an employee, you could face penalties as well as retroactive payroll taxes and other expenses. In other words, you’ll get into trouble and have to pay a lot of money to the government (and possibly the specific employee in question).
Keep in mind that simply agreeing to be hired as a contractor does not make someone a contractor legally. One employer was recently audited by the employment agency in her state. Despite the fact that her entire team decided to work as contractors and signed independent contractor contracts, they were nonetheless classified as employees.
As a result, all of her workers had to become employees, and she had to pay a total of $15,000 in late payroll taxes and penalties.
Finally, they can assist you in a variety of ways.
If you require assistance on a temporary basis or for work that supports your firm but is not part of your primary product or service, you should consider employing a contractor. Assume you own a fitness centre. Contractors could include the following:
- Designer of logos
- Remote bookkeeper on a monthly basis
- A new website’s copywriter
- Photographer specialising in headshots
Notice how each of these roles requires specific knowledge outside of your company’s operations? All of these instances, with the exception of the bookkeeper, are short-term jobs with a defined deliverable.
If you require continuing assistance with work that has a direct impact on your company’s operations, you should consider hiring an employee. Employees provide more than just a single deliverable; they also provide continuing support. Employees for a fitness studio could include:
- Assistant in administration
- Trainers who provide continual instruction
Choosing between an employee and an independent contractor
Assess your requirements first. Consider what kind of assistance you require and what recruiting options you have.
Then consider the following list of questions to ask yourself about the role you’re considering. After you’ve given these some thought, contact an attorney or counsellor who can help you through your state’s job categorization rules.
The more “yes” responses you receive, the more likely you are to need to hire an employee rather than a contractor.
Do you require the services of an employee or a contractor?
- Will the employee be obligated to work according to your schedule, including when, where, and how?
- Will the employee be required to complete tasks in the order that you specify?
- Will the employee work on your property or at a place that you specify?
- Will the employee use your equipment, tools, materials, or supplies? Contractors typically invest their own money in tools and equipment.
- Will the employee be required to work during specific hours? Will they, for example, be required to work at your facility from 10 a.m. to 5 p.m. every day?
- Will the employee have to work full-time? If you do, you’re limiting their capacity to work outside of your company, which means they’re an employee.
- Is the task you’re doing part of your regular business operations? In other words, does the success of your company hinge on the task they’ll be doing?
- Is training necessary? Independent contractors typically do not require training because they are already knowledgeable in their field.
- Do you have a working relationship with the employee? If someone works for you on a regular basis, it is likely that they are an employee.
- Will you require the employee to submit activity reports? If so, it demonstrates that you care about how the job is done.
- Will the employee be paid a set salary, an hourly payment, or a predetermined rate per item produced?
- Will you have control over how and when the employee is paid? Contractors are compensated per work, and they usually bill for their services once the job is over.
- Is the employee permitted to work for many companies at the same time? You’ll want an employee if you require somebody to work entirely for you.
- Are the services of the worker open to the broader public? It signifies that a worker is a contractor if they provide their services to the wider public.
- Can you dismiss the employee without cause? Employers have the right to fire employees. Independent contractors are hired to do a work and are not fired unless they break their contract restrictions.
- Can the employee leave at any time? An independent contractor cannot be dismissed unless they breach their contract’s terms, and they are also contractually obligated to complete a work.