menu

Pros and Cons of Hiring Independent Contractors vs Employees

Rachel Present Schreter | Jun 27, 2018

Bringing someone new into your business can be tough. You’ve invested your heart and soul into this endeavor and trusting even a small part of it to someone else is a big step. On the other hand, it’s a sign of success and an important part of the growth process.

Getting the Help You Need

Hiring help for your company comes down to finding the right person with the right skills to match your needs and your company culture. But finding that person is a multi-step process that begins with defining your needs. This varies depending on your business type, your resources, and your business’ existing strengths and weaknesses. Once you decide what kind of help you want, you’ll have to decide which legal framework makes the most sense: employee or contractor?

Employee or Independent Contractor: What’s the Difference?

The simplest way to view the question of independent contractors vs. employees is that an employee is a permanent member of your team, while an independent contractor is a separate business that provides a particular service. The IRS website offers a good way to think about the difference between an employee and contractor: with an independent contractor, you get to define what the results should be but only with an employee do you get to control how they get to those results. However, in a lot of cases, the day-to-day operations of an employee and an independent contractor can look pretty similar. The practical differences mostly come into play in the legal and financial paperwork.

Contracts

Whether you’re hiring independent contractors or employees, you will need to have some sort of contract. The content is what will differ. An employment contract will likely be pretty extensive, including employment benefits, work hours, sick day and vacation policies, etc. Most of these are not relevant for an independent contractor. Their contract will have to define the scope of the work even more carefully than an employee’s contract, but won’t include a lot of the details about taxes, insurance coverage, etc.

Salaries

Employers are generally required to cover things like health insurance and social security payments for their employees, but not for independent contractors. That’s why many companies believe it’s cheaper to hire contractors than employees. But keep in mind that a skilled contractor will often expect more per hour than an employee with the same qualifications, to make up for the lack of benefits. There are also significant legal penalties for misclassifying workers in order to get around the need to pay for benefits. Not having to pay for benefits is just not a good enough reason to choose independent contractors vs. employees: it won’t be cost-effective in the long run and suggests to talented workers that you may be trying to take advantage of them.

Taxes

As mentioned above, there are a number of taxes you’ll have to pay if you hire employees as opposed to independent contractors. You will be responsible for withholding income tax and paying social security, Medicare, and unemployment taxes. Contractors are responsible for taking care of these things for themselves.

Insurance and Liability

An independent contractor is the owner of their own business, no matter the size. If they cause injury or property damage while on the job, they are responsible, just as you would be responsible if you had caused it. They need their own insurance to cover mistakes and accidents. An employee’s work, or damage they might cause, however, needs to be covered by your contractors’ insurance. Of course, if something happens on your client’s property, your client may not differentiate between your employee and someone you’ve subcontracted for a specific task. Even if you’re not legally responsible, you will still be the client’s first address for complaints. On the other hand, hiring employees doesn’t necessarily simplify things – it means you will need to provide additional types of insurance, including health insurance and workers comp.

Relationships

For many business owners, the independent contractors vs. employees decision comes down to the type of relationship you want to create. Taking someone on as an employee is an investment. You put in a lot of responsibility and you get back loyalty and control. Having an employee means you have to cover certain employment benefits and may not be able to let go of your employee whenever you want. On the other hand, you get to decide where, when, and how your worker does the job, and can even train them to do it a certain way. Many people appreciate the security and predictability of employment. They are willing to do things your way in order to be part of a team and to have someone else take on business risks. The employee-employer relationship is one that can build over time. It allows you to mentor your employees, earn their loyalty, and build a trusting partnership. Although those advantages can’t be measured, they provide significant value to any business.

Independent Contractors vs. Employees: Pros and Cons

As you can see, this isn’t a clear-cut decision. It depends on your particular needs, goals, and resources. To help you think it through, we’ve laid out the advantages and disadvantages of each option:

Independent Contractor Employee
ProsCons Pros Cons
TimingHire just for as long as you needMay not be available when you needAlways available at set timesCan’t be fired suddenly
CostPays for insurance, equipment, and taxes by themselvesMay charge higher hourly rates to compensateMay require lower pay in exchange for securityEmployer must pay taxes, insurance, and salary, even when business is bad
LiabilityEmployer is not liable for accidentsEmployer can be blamed, without any ability to prevent problemsEmployer is liable for accidents or mistakesEmployer has control and can work to prevent problems
Long-TermNo strings attachedContractor has no obligation to employerLong-term relationship and security creates loyaltyEmployee is responsible for employee well-being
ControlWork is off employer’s plate completelyNo control over how work is doneControl over how, when, where work is doneResponsible for training and supervising
SkillsMust have the skills to be independentEmployer cannot train contractor to use specific methodsEmployer can train employee in useful skillsMay lack ability to work independently

Employee V. Independent Contractor: What’s the Verdict?

This depends on what you’re looking for. Usually, an independent contractor is the way to go if you need a particular skill or service for a specific, isolated project or if the work isn’t related to your core business. For example, if you need someone to clean your office once a week or a customer has requested that you provide a particular type of cabinet in the kitchen you’re installing. But if you’re looking for someone who can assist you with the part of the job that you do every day, an employee is probably the better way to go.

Authors

  • Sofya PogrebSofya Pogreb
  • Sanjay BiswasSanjay Biswas
  • Natalie CutlerNatalie Cutler
  • Guy GoldsteinGuy Goldstein
  • Rachel Present SchreterRachel Present Schreter
  • Alon HuriAlon Huri
  • Evyatar SagieEvyatar Sagie
  • Zeke ScherlZeke Scherl
  • Annie RyanAnnie Ryan
Rachel Present Schreter
Rachel Present Schreter | Author
Rachel is passionate about helping small businesses get the tools they need to succeed. Rachel is a marketing guru with years of experience working with tech companies, non-profits and small businesses to ensure that they are reaching the right audiences with their products.

You may also like

small business insurance online

How to Protect America’s Greatest Resource: Small Businesses

Guy Goldstein | Jan 18, 2017

Though some might argue that America runs on Dunkin Donuts, this country actually runs on small businesses. Companies with fewer than 100 employees account...

business insurance AI bot

The First Ever Chatbot For Small Business Insurance: Because who said insurance can’t be easy?

Guy Goldstein | Mar 14, 2017

Today, we’re very excited to announce the launch of the world’s first full insurance sign up via Facebook Messenger. Alongside our friends at SmallTalk,...

general liability insurance

Why don’t we offer insurance to all types of small businesses?

Sofya Pogreb | Apr 9, 2017

As the Next Insurance leader responsible for our insurance product and our Advisory team, I am delighted when small business owners call us to...

Authors

  • Sofya PogrebSofya Pogreb
  • Sanjay BiswasSanjay Biswas
  • Natalie CutlerNatalie Cutler
  • Guy GoldsteinGuy Goldstein
  • Rachel Present SchreterRachel Present Schreter
  • Alon HuriAlon Huri
  • Evyatar SagieEvyatar Sagie
  • Zeke ScherlZeke Scherl
  • Annie RyanAnnie Ryan

Subscribe to our blog

Follow us