If you’re looking to bring on some independent contractors or employees to help you accomplish your goals for 2023, you better have worker classification on the mind. How you classify workers affects what paperwork they’ll need as well as how you’ll pay them, what benefits they’ll be entitled to and how/when they execute their responsibilities. The IRS is paying close attention to how employers classify workers and it’s worth thinking about up front to prevent issues later.
What’s The Difference Between an Employee And an Independent Contractor?
Much of the difference between the two comes down to control. While the employer determines what they want done, independent contractors control how and when they accomplish the tasks. They have a lot of flexibility and they are usually not entitled to company benefits. Since they are often hired on a project basis, it usually requires less up-front training to bring them up to speed. Independent contractors are appropriately named because their working arrangements and goals are stipulated in a mutually-agreed upon contract. Contractors pay for their own self-employment taxes, payroll taxes, and benefits.
Employees, on the other hand, are subject to the employer’s stipulations for when and how a worker accomplishes their tasks. Employees usually take more time to train and bring up to speed and also cost more overall because they are entitled to benefits such as 401Ks, health insurance, overtime, and more. Beyond federal requirements, you may be required to offer additional benefits like dental and vision insurance, paid time off, disability, and more. Aside from the costs of payroll, the actual process requires an investment, too. At a minimum, you need payroll software and sometimes it requires a whole department to manage the logistics of such a complicated process.
Employees tend to have a large up front learning curve, but it flattens out because they don’t need to be retrained for the same ongoing tasks. You may also end up paying for recruiting and professional development costs for internal staff.
When Should I Hire an Employee Versus an Independent Contractor?
While it may look like an employee always costs a company more, it isn’t always true. Contractors often charge a premium rate since they are paying for their own benefits and the very best ones can justify top dollar for their services. Still, costs are only one part of the equation. When you’re considering whether to hire an independent contractor versus a full-time employee, you should consider what kind of work you want done.
Independent contractors are great for short-term projects, specialized creative tasks, seasonal needs, and work that is beyond your core business. Independent contractors are great for things like building a new website, designing marketing materials, and handling administrative tasks.
Employees are best when the company needs to be able to stipulate when, where, and how the work gets done or when the work is long-term and ongoing. If the work is central to your core business, think twice before you classify workers as independent contractors. The companies that end up in the news are often the ones that call the workers at the core of their business contractors. Think Uber and Instacart–which have fought to maintain that their drivers are contractors even though their work is central to their business.
The Bottom Line
Which type of worker makes sense—both for your business in general, and for each individual role you need filled—depends on many factors. No matter who you bring on, one of the most important things you can do to protect yourself is classify them correctly. If you are trying to determine how to classify your workers, this 5-minute self audit may help. You may also wish to have a conversation with one of our experts if you need more support.