What You Need to Know About Hiring a Contractor or an Employee

Hiring an independent contractor instead of an employee benefits your company in several ways, but there are limits and drawbacks to this type of business arrangement. Find out basic information about worker classification and what it means for your staff and your company as you seek the best possible solution for your staffing needs.

Differences Between an Independent Contractor and Employee

An employee and independent contractor differ in the level of control you have over the hire. You can control what an employee does, because an employee shows up for work at a specific time, has specific job duties and performs work under the auspices of a particular company's internal policies. This level of control is based on the work agreement signed by an employee.

A contractor has no limitations in terms of number of hours to work, when to work or how much effort to put into a project. If a contractor wants to work on a coding project from 3 a.m. until noon on a particular day, he can do that. A contractor often supplies his own equipment and the tools necessary to complete the job.

Rather than working on a wide spectrum of job duties at an office, an independent contractor focuses on one specific project over a span of time. For example, you might hire a freelance writer to compose a 3,000-word white paper. The methods the writer uses are up to his discretion, plus you don't have to explain your company's entire hiring policies or training process to that person. All the writer needs is a basis for doing research, a basic style guide and a due date.

Compensation and Withholding

Rather than an hourly wage or a salary, an independent contractor works to fulfill a specific contract and receives a specific amount of compensation. There are no fringe benefits, 401(k) plans, health insurance or even income tax withholdings. Once the contractor finishes a project, he receives payment as a lump sum. Consider the benefits of hiring a coder for $60,000 to make an app versus onboarding an IT person for $100,000 per year plus benefits. Choosing a freelance coder would save your company a substantial amount of money.

How to Tell If You Have a Contract Position or Employee Position

The IRS looks at several factors in terms of worker classification to determine if you have a contract hire or an employee. A contractor does work mainly outside of the office, rarely goes through company training, has a temporary job instead of ongoing work, receives payment once the work is done instead of getting an hourly wage, and pays for his own travel costs. If you misclassify a worker, you may face fines, penalties and back taxes from the IRS.

Independent contractors can save your company a lot of money. Contractors have the skills to complete a specific project for your team, but you may not have the ability to control the outcome of the project. That's when an employee comes in handy.

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