Employees vs. Independent Contractors: What You Need to Know

Congratulations! Your business is doing so well that you are starting to feel overwhelmed. While you have to take care of the needs of your clients, you still have to do all of the marketing and take care of operations. It is clearly time that you hire someone to help. In this article, we will explain the differences between independent contractors and employees and the pros and cons of each so that you can make an informed decision on what is best for you and your business.

Independent contractors are people or businesses who contract to do work for another person or business according to their own methods and processes. The contractor is not subject to your control. Advantages of having independent contractors include not having to pay employer taxes and not having to give the contractor any benefits. Thus, you can save money by hiring independent contractors. The cons of independent contractors are that you cannot control how the contractor does his or her job, reducing your control over the worker and the project as a whole.

The main disadvantages of the employees are the costs – you will have to pay employer taxes and, depending on your business size, you may have to provide benefits. The pros of employees is that you have much more control over when they show up for work, how they do their work and can direct their work to your liking. Employees are also generally more loyal to your company and to you. How do you know if a worker is an independent contractor or an employee? The Internal Revenue Service provides the following 3 questions that will help you gain clarity on the subject:

  1. Behavioral: does the company control or have the right to control what the worker and how the worker does his or her job?
  2. Financial: are the business aspects of the worker’s job controlled by the payer?
  3. Type of relationship: are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?

Unfortunately, there are no set-in-stone type of categories and questions that will determine whether someone is an independent contractor or an employee. However, a good rule of thumb to remember is that the less control you have over the worker, the less likely it is that he or she is an employee. Here is a chart that may be helpful in evaluating the differences between an independent contractor and an employee:

Employee Independent Contractor
Usually devotes their full time to working at your company. Usually provides services to more than 1 company.
Works set hours, usually at your location. Determines their own hours and can work from anywhere.
Works under your control and direction. Works independently and does not have to follow your instructions.
Receives a net salary after you withhold taxes, FICA and social security. Pays his or her own self-employment taxes.
Will receive worker’s compensation if injured on the job. Not eligible for worker’s compensation.
Is covered by wage and hour laws. Is paid according to the contract.
May be entitled to form or join a union. Is not entitled to form or join a union.

If you are looking for someone to help our for a few hours per week on some ancillary tasks such as answering the phone, sending cards to your clients or proofread, chances are that you need an independent contractor. On the other hand, if you are looking for someone who will be working 40 hours per week, helping you find new clients and growing your business, you will probably need to hire an employee. Whichever you choose for your business, always remember that you should have contracts for anyone who is working for you so that you can protect your trade secrets, employees, your business and yourself. We hope that this has helped you make an informed decision.


By | 2017-02-01T10:58:14+00:00 October 17th, 2016|Employer Resources, Startups|1 Comment

About the Author:

Donata Kalnenaite, Esq. is an attorney licensed to practice law in Illinois and is the founder of LegalDepartment.co. She is a graduate of The John Marshall Law School and is experienced in business law. She loves educating her clients and the public on legal terms and contracts.

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  1. […] and an independent contractor? Or perhaps you need a refresher? Take a look at this article Employees vs. Independent Contractors: What You Need to Know. Excellent […]

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