1099 Tax Software Blog

When it comes time for your business to hire a worker for a particular role, hiring an independent contractor can be an attractive option. There are some great benefits to hiring an independent contractor but these types of workers are not without their disadvantages.

In general, independent contractors will cost less than employees. For instance, if you have employees working at a physical location, the costs of overhead including rent, utilities, and equipment are your costs. Independent contractors generally use their own equipment which saves you those costs, and are often able to complete their work without taking up any of your office space. And, employees require federal and state taxes and insurance payments on their behalf, whereas independent contractors do not.

Independent contractors are not obligated to be loyal to your particular business. This particularly becomes a problem if the same contractor is hired at some point by your competitor. It would be very difficult to convince a contractor to not work for your competitors. Employees will often readily accept a clause in their contract that prohibits a second job, or working for a competitor even in the future. Also, many corporations and business have these types of clauses in their employee contracts to prevent trade secrets and other competitive advantages from being leaked to competitors.

Independent contractors are more flexible for your needs, and you may easily switch between them for your company’s specific needs. Hiring and firing employees can be more complicated than independent contractors. Once the independent contractor is finished with his or her job, you may choose to work with a different independent contractor with no legal issue or stress. Employees can be fired legally on the basis of poor job performance, but this is also not without risks and stress, particularly wrongful termination lawsuits.

A problem with independent contractors is that their rates fluctuate. Since independent contractors are not required to have a maximum or minimum rate, they generally change their rates as demand for their work increases or decreases. Your budget will have to fluctuate to accommodate an unpredicted increase in your contractor’s rates. Also, you may not be able to hire your independent contractor if his or her rates increase, and you may have difficulty finding another contractor with the same experience and skill level at the rate you were paying. Hiring an employee with a predetermined wage per hour prevents an unpredicted increase in payroll costs and gives you more control over your budget.

Although rates per hour might be higher with independent contractors, there are also a number of reduced payroll costs. Independent contractors will not ask for or be required to have health insurance, which is a substantial cost in the United States for employers with a company health insurance policy. The reduced cost for no benefits, and also no requirements for minimum wage or union demands (in most cases), will usually end up costing your company less per year.

So, by knowing some of these benefits and disadvantages of hiring an independent contractor, you will be better prepared to decide whether an independent contractor or employee fits your needs when you’re ready for your next hire.

For business owners, there is going to be the inevitable dilemma on the choice of whether or not they wish to hire independent contractors or employees as workers. Not only is the determination of whether a worker is an employee or contractor a sometimes complicated choice, but the tax and other benefits and disadvantages of the two types of workers is another detailed issue. This article will go into detail on some of the advantages and disadvantages of hiring an employee over a contractor from an employer’s perspective.

First, if you are looking to hire an employee, it should be noted that there are differences between part and full time employees. Without going into too much detail on this difference, which requires much length to explain, part time employees are generally cheaper to hire because they do not require certain benefits, and they are often helpful if your business is seasonal.

A disadvantage of hiring an employee is increased payroll costs. The law requires you to pay your employees a share of their Social Security and Medicare taxes. Also, state unemployment insurance and workers’ compensation insurances are required to be paid by you as the employer. Together, these taxes and insurances can increase your payroll costs from 15-35%.

An advantage of hiring an employee is that you will almost complete control over when, where, and how the worker does his or her job. This can be quite advantageous, especially when independent contractors are not trained in very specialized needs for your business. More control over your employees also allows you to assign them to a wide variety of tasks that they can be trained in, whereas contractors are often hired for just one specific task that they specialize in.

Employees have several legal rights, and as a result you have more of a chance of being sued by an employee than an independent contractor. Although workers’ compensation covers many types of on the job physical injuries, there are other lawsuits which may be filed including any type of discrimination, harassment from other workers while at work, and other lawsuits.

However, an added benefit is that employees are loyal to your business alone. You will not need to worry about the competition for skilled independent contractors that often requires businesses to pay much more per hour to them than an employee. Also, employees may be more motivated by the potential for promotions and may show more commitment to the business because they are a part of the team.

Also, hiring independent contractors for a large variety of tasks can be quite time consuming. There is always the issue of arranging contracts, communicating your project needs to the contractor, and sometimes contractors are quite difficult to control. A physically present employee is generally willing to perform tasks immediately, there is no need to waste time preparing a contract for each and every task that the employee would perform, and communication with employees is much more convenient and easier than independent contractors.

These are a just few of the benefits and disadvantages of hiring an employee. Ultimately, the choice of hiring mostly independent contractors or employees is a complicated one, and for particular businesses having mostly employees as workers is efficient and for other businesses it is not.

There are several benefits and disadvantages to being an independent contractor.

With greater freedom comes greater responsibility, and in general, tax and legal issues become more under your own control rather than your employer’s as an independent contractor. So, you will have to get acquainted with some of the basics when it comes to these issues, and you will probably end up hiring professionals to assist you with them.

As for personal preference, knowing whether or not you are better suited to be an independent contractor or employee is ultimately a matter of knowing your own strengths and weaknesses.

One obvious benefit of working as an independent contractor is that do not have a boss you must report to. This allows a great deal of freedom over when, where, and how you do your work. For self-motivated people, this is a benefit because these types of people do not depend heavily on a supervisor to get their work done. These types tend to do very well as independent contractors.

For people who need a little self-motivation, this might end up being a disadvantage. The lack of oversight can create procrastination habits in some people. Thus, many independent contractors struggle with keeping up with their tasks and staying focused because of not having someone to report to.

There are tax benefits to being an independent contractor. For example, the cost of any equipment purchased for your business is often tax deductible. Also, the cost of gas on business trips can be deducted, along with several other types of deductions. Although self employment tax and income taxes are deducted from your earnings as an independent contractor, the many other tax breaks you receive can help reduce the bite of those costs. For employees there are no such tax deductions for gas and other costs.

On the other hand, there are often benefits that employers give employees that independent contractors often do not receive. Although income and other taxes are often heavy on employee earnings, there are a number of advantages to being an employee which include unemployment insurance and workers’ compensation. If an independent contractor does not purchase supplementary insurance, he or she will not be covered in many circumstances.

Also, benefits such as paid vacation, health insurance, and child care are very rare for independent contractors, while employees may enjoy those benefits. Just the cost of health care alone may be enough to warrant being an employee. However, if as independent contractor you make substantially more income, you may be able to easily afford an individual or family health care plan.

So, ultimately the choice of independent contractor or employee comes down to the individual. Do you like having guaranteed and steady income, benefits, insurance, and someone to motivate you to work? If so, you are likely better suited to being an employee at a job with good benefits. However, if you are a self starter, highly motivated, good at marketing yourself or your business, and can make enough to pay for insurance, you may do well as an independent contractor.

The common-law-rules as defined by the IRS can help business owners determine whether their workers are considered employees or contractors. It is crucial for business owners to make this determination because each classification is subject to different tax withholdings and laws.

A business owner may do this by considering the degree of control over the worker, and also the nature of the relationship with the worker. The IRS defines this by three categories: behavioral control, financial control, and the type of relationship between the business and worker.

Behavioral control refers to how much the business owner controls how the worker does his or her job. Behavioral control is further classified by the IRS by four categories:

1.) Type of Instructions Given – Does the business mostly determine when, where, and how to work? Contractors have a greater degree of control over these details.

2.) Degree of Instruction – In general, the more detailed and elaborate the instructions are that the business gives the worker, the greater the chance that the worker is an employee.

3.) Evaluation System – If there is some kind of ongoing job or work evaluation system, the worker is likely an employee.

4.) Training – If there is detailed job training, it points to the fact that the business owner wants the job done in a very specific way. Also, if there is continual training during the worker’s tenure, then the worker is likely an employee.

Financial control refers to how much the business owner controls all of the financial circumstances of a worker’s job. This control falls into five categories:

1.) Significant Investment – Does the worker purchase his or her own equipment? Generally, independent contractors purchase their own equipment.

2.) Unreimbursed Expenses – Independent contractors have more unreimbursed expenses than employees.

3.) Opportunity for Profit or Loss – Independent contractors have a greater potential to lose money on their contracts. For example, the cost of equipment for a job might be more than the contractor’s earnings for that job.

4.) Services Available to the Market – An independent contractor is allowed to have his or her own individual freedom to market their business or service. Many employees are not.

5.) Method of Payment – Many employees are paid hourly and guaranteed a specific wage per hour. Independent contractors can be paid hourly or with a flat fee.

Type of relationship refers to the details on the perception of the relationship between the business and worker. The categories that determine type of relationship are as follows:

1.) Written Contracts – Even though a contract may state whether a worker is an employee or contractor, the IRS is not obligated to agree with this classification.

2.) Employee Benefits – Employees are more likely to have benefits like paid vacation, sick leave, health insurance, and others.

3.) Permanency of the Relationship – Employees are more likely to be hired on an indefinite basis, whereas independent contractors are generally hired for fixed terms.

4.) Services Provided as a Key Activity of the Business – Employees that provide services such as consulting or advice are still mostly under the control of their employers.

With these common-law-rules, businesses can make a reasonable guess to what their workers are classified as. Again, if there is any question, the IRS will make the official classification from form SS-8.