However, in our increasingly mobile world, hiring isn’t just a matter of finding the right employee. Whether virtual or on-site, sometimes an independent contractor is a better fit for the job at hand.
What’s the difference? According to Bankrate’s site, the difference is based primarily on the degree of control and independence over the work.
“An employee typically performs duties dictated or controlled by others. In many cases, an employee is provided training [and necessary tools] to do the job. And an employee works for only one boss.
“An independent contractor, on the other hand, generally has several clients. A contractor has his or her own tools (and in the modern workforce, this means digital devices, not just hammers and wrenches) and sets his or her own hours. And a contractor invoices for the completed work.”
Hiring an independent contractor can be a good fit if the job at hand requires a specialized skill that the company lacks or the business owner doesn’t plan to specialize in. It can also be a good idea for a short term project or a busy season. If a small business needs to save on labor costs, this option can also be a good way to go. An employer doesn’t need to pay benefits for contractors. Additionally, companies can save on taxes because it’s not necessary to pay the employer portion of Social Security, Medicare or state unemployment.
However, it’s important to understand and abide by the classification difference. It’s never a good idea to hire a contractor just to avoid the tax implications when you actually need/want an employee. If your company improperly hires a contractor when it should hire an employee, it is the business that will bear any compliance burdens and potential punishments. The IRS can come after your company when it discovers the misclassification and collect unpaid employment taxes. If you hire an independent contractor, you will need to file a 1099 if you pay him or her more than $600/year.
When is it time to hire an employee instead of a contractor? According to Raymond Grainger’s article on Entrepreneur, “The decision to hire full-time employees doesn’t have anything to do with the size of the organization as much as its profit margins. If the billable time of current full-time employees is at or above 85 percent and the profit margins are at least 50 percent, those are good indicators that the company is ready to add another full-time employee. A company makes less of a profit margin on contractors, so it’s important to factor in their workload.”
By Grainger’s reasoning, if these numbers aren’t being reached, the company is better off keeping its costs variable (by using contractors) until the firm can reach these margins.
Sourcing quality talent through independent contractors can be a good strategy for business owners. It’s just important to understand the ways they are different from employees and to use each classification well. Whether you’re hiring an employee who is going to be with you as a long-term investment or you’re working with a specialized contractor, there’s great value in knowing where the best talent is and how to manage it.