The Benefits of Hiring Employees vs. Independent Contractors - The Complete Guide

As your business grows, you will have to decide between hiring contractors or employees.

Both will get the job done. Still, the type of employment you select when hiring will play a significant role in the future.

Let's discuss the pros and cons of choosing each option so you have all the information. We'll also cover when having an employee is better than a contractor, and warn you of the possible pitfalls of a wrong choice.

What is an employee?

An employee is a person who is a permanent member of your team, hired to perform a specific job for your company in exchange for a salary. You're responsible for paying their wages/salary, withholding appropriate taxes, and providing statutory benefits.

What are the pros of hiring an employee?

Having the right people on your team can make or break your business. In a great work environment, your employees keep your company's best interest at heart and are motivated to do their part to help it grow.

With employees, you can have more control of their day-to-day work. You can direct, train, and assist them in acquiring new skills so they can take on different tasks.

Employees are also much cheaper in the long run. Relevant taxes and benefits may seem expensive at first. But, outsourcing the tasks an employee can complete will prove costly in the long run.

Is there a con to hiring employees?

One of the main cons to employees, and often the main reason why businesses take on independent contractors instead, is the lack of niche expertise. While you can easily improve this if the person is employed full-time, you might need the expertise sooner to complete a task.

As an employer, you can provide an employee with corporate training to improve their expertise quickly.

Another con is that you're limited to local talent. Hiring in another country can be difficult, so choosing an independent contractor is often simpler. It's, however, riskier in terms of compliance. A good Employer of Record can help you hire global employees and make the process easy and legally compliant.

What is an independent contractor?

An independent contractor is self-employed and works for other companies on a contract basis. They generally have niche expertise and you hire them to support or complete specific projects.

As the name suggests, independent contractors don't depend on your company like employees do. They manage their own time, equipment, and workload. They charge an agreed-upon price for their work and manage their own taxes and benefits.

The autonomy of an independent contractor can be a blessing or a curse for your business. You don't have to put them on a payroll, but you also can't expect the same level of commitment to your company as you get from those who are on it. Let's dive deeper into this topic.

What are the pros of outsourcing work to independent contractors?

One of the main reasons businesses outsource work to contractors instead of hiring someone full-time is the cost. With a contractor, you pay for their services according to the contract. You don't have to pay them a salary, calculate taxes, or provide mandatory benefits.

Most independent contractors have a niche expertise - which can also be beneficial for a business hiring them. You can rely on their experience to get the best results while outsourcing niche-relevant tasks. Since they focus on specific tasks they excel at, you get faster results than with a full-time employee, and you don't have to manage them as much.

With independent contractors, there's no need for a lengthy onboarding and offboarding process, as they don't have to know about all of the operations in your company. You can include them in a project on a need-to-know basis, and once the contract is complete, you're both free from obligations.

What are the cons?

The autonomy of independent contractors can go both ways. This type of cooperation might not be as easy on you if you have a hands-on approach to management. For example, both of you need to agree on "how" beforehand if you want to get something done in a specific manner.

You can't expect them to always be available throughout the workday or take on additional, out-of-scope tasks. You must be careful about intellectual property rights and other legalities with a contractor. Contractors, unlike employees, retain ownership of their work by default. To prevent losing control of crucial intellectual property, you have to secure ownership through clear contracts.

What is employee and contractor misclassification?

It's a common mistake, especially in the "gig era." It can also happen if you have people working remotely or globally. The lines of classifying a worker as either an employee or contractor can get blurry as you're trying to get global top talent on your side.

In the US, the IRS has around 20 parameters to estimate if you have misclassified a worker - many of those apply to other countries, too. Here are some sure-way parameters to estimate how you should classify a worker in your company.

1. How are they getting paid? You should classify them as contractors if you pay them once the project is complete instead of monthly, weekly, or daily.

2. Who controls how, when, and where? If a worker is following the company's policy or your instructions while handling the task - you've got an employee. A contractor will follow a set of best practices for the job and may or may not accept your instructions. When and where are also important, even though remote work made it less relevant than before. Still, if you expect them to work 9-5 from your office, you should classify them as employees.

3. Is the work ongoing - or project-based? Project-based contracts often have deliverables and deadlines that affect the payments. If your cooperation involves such contracts - you have an independent contractor.

As you can see, you can interpret most of these one way or the other. However, even unintentionally misclassifying your employees as contractors can have serious repercussions for your company. You'll likely have to pay fines and penalties and pay back the taxes you'd typically withhold for an employee.

If an employee misclassified as a contractor decides to start a lawsuit, and misclassification is found to be intentional, companies can face criminal penalties and pay punitive damages.

Therefore, once you discover that one of your contractors should be an employee, it's best to convert them as soon as possible.

Why should I convert an independent contractor to an employee?

Misclassification is a significant risk, but it's not the only reason to convert contractors to employees.

If you are happy with a contractor and they prove to be a valuable asset to your company, hiring them as an employee will allow them to become more involved and play an active role in the company's future.

You will also be able to depend on them more. Even if you both agree that they get to keep the flexibility they are used to, you can ask your new employee to perform tasks when it's more convenient for you. You also have greater control over how they perform their tasks, and which tasks they will be completing on a day-to-day basis.

As an employee, they are also entitled to statutory benefits. You can offer them additional benefits, such as healthcare and pension plans. These will help employees feel valued, and less likely to leave you in search of better options. In the end, this can also stop your competitors from hiring them for a permanent position before you do.

Also, if your trusted contractor asks to become an employee - don't hesitate. It suggests they want to become a more significant part of your team, or would be more comfortable and focused on your company if provided with some benefits they are otherwise not eligible for. While hiring them as employees might seem expensive, it's a much cheaper choice in the long run.

Employees vs. Independent contractors - which one do you need?

As we've seen, contractors and employees both have pros and cons. The best choice depends on your company’s needs. An employee is a better option if you're looking for someone to work in your team on a permanent basis. If you occasionally need specific expertise outside of your core team, hiring an independent contractor is the way to go.

Also, make sure to think about it long-term - those occasional tasks may prove more common or more beneficial as your company grows. Plus, it shows the independent contractor that you’re committed to working with them on an ongoing basis while providing them with the security they deserve.

Once an employee, you can offer them benefits to motivate them further, while staying compliant with local laws and regulations. With the right Employer of Service, you can have them as a permanent member of your global team and avoid the complexities of hiring contractors globally.

FAQs

Is an independent contractor self-employed?

Yes, an independent contractor is self-employed. Independent contractors are responsible for paying their own taxes and benefits.

Who is my employer if I am an independent contractor?

As an independent contractor, you are your own employer. As a boss, you set your working hours, location, and the type of work you are willing to take on for your clients. You are responsible for generating revenue and for paying self-employment taxes and benefits. Depending on the local law, you are also personally liable for any business mishaps or debts.

Are independent contractors considered employees?

There are major differences between employees and independent contractors. You pay employees wages or salaries and independent contractors per project. With employees, companies have to maintain compliance, withhold taxes, and offer benefits. Managers have little to no control over working hours, location, and methods with an independent contractor. The independent contractor often works for more than one client simultaneously.

Are employers liable for independent contractors?

In theory, companies aren't liable for independent contractors. However, there are exceptions to the rule, depending on the level of control employers have over the contractors.