Employee vs Contractor: Which Route Makes Sense for Small Business?
By Pekin Insurance · Oct 9, 2019 ·1 min read
This business quarter sped by like a sprinting cheetah, and you could use help with the extra work lined up through the end of the year. These tasks won’t take more than a few months, but you don’t know how to solve the employee vs contractor dilemma.
What’s the best way to go?
You’ll see pros, cons, and legal risks with hiring both types of workers. This quick guide will help you make a decision, but you should consult a legal advisor to clear up questions.
Basic Differences Between Employees and Contractors
- Works for you at your discretion during hours you determine.
- Receives instruction from you or a company supervisor.
- Gets paid through company payroll.
- Uses company equipment and space to perform work.
- Has access to employee benefits.
- Receives a W2 form at the end of the tax year.
- Works for herself or another company as a sole proprietor or an LLC.
- Works on a contract basis to perform tasks.
- Gets paid through accounts payable as a vendor.
- Doesn’t receive benefits from your company.
- Should use her own equipment and workspace, except in special circumstances.
- Receives a 1099 form at the end of the tax year.
You can’t choose contractors’ working hours or tell them how to do the assigned work. You can set deadlines for them, though.
If you hire someone as an employee, you have more authority over things like:
- When and how they perform work for you.
- What equipment or tools they use.
- Where they work.
Most states have at-will employment. This creates fewer legal consequences after an employee termination.
Contractors tend to cost less than employees because they:
- Don’t receive benefits.
- Receive pay through accounts payable, which negates payroll taxes.
- Work on fixed rates in most cases.
- Don’t receive overtime pay if they exceed 40 hours per week.
The Big Risk
Independent contractors might sound more appealing from a budgetary perspective. The cost savings disappear if you get caught misclassifying an employee as a contractor, though. This action could lead to:
- Lost wages
- Department of Labor audits
Which Is Right for You?
Only you know if your business needs an employee or a contractor. Don’t let the temptation of cost savings influence your decision.
You have a lawful duty to pay employees as employees when they meet the criteria. When in doubt, classify someone as an employee, even if the worker is temporary and asks for a contractor classification.
You should also consider:
- How many hours someone works for you.
- The length of a contract.
- Situations where you ask someone to do work outside of contract terms.
Whichever classification fits, notify the employee and give them the correct paperwork. Improper notification leads to complaints and lawsuits. It could cause workers financial strife or other hardships at the end of the tax year.
Consult a professional for a more detailed legal definition of an employee or contractor.
Don’t lose sleep over employee vs contractor questions. Talk to your local Pekin Insurance agent about business liability insurance that covers you in the event of a misclassification.