Hiring Staff Employees Vs Independent Contractors: Which Is Better For your Business?

When it comes to hiring workers, a frequent crossroad that greets business owners is whether to choose standard employees or independent sub-contractors. When asked the age-old question of which is the better option, there is no real concrete answer. It comes down to what is more cost-effective relative to the  business and the work being performed. According to the Bureau of Labor Statistics, a healthy  6.9% of US workers are independent contractors as of 2018, representing a significant chunk of the workforce. At a glance, it may seem that using sub-contractors is less expensive, as the contractor shoulders the burden of payroll tax fees, insurance, and more. But it’s not quite that cut & dry. For instance, the question of controlling the  quality of work being performed and the effects that may render on the business profits. Let’s look at some of the major differences between the two and how it may affect your business. 

What’s The Difference in Requirements?  

The major difference is an employer has total control over how, where, and when the staff employee will perform his or her job, while the employer only has control over the final result or product that the independent contractor has been hired to complete. Actual employees of a business (W2 employees) are considered long-term workers who work for an employer who controls the details of their work performance. These workers come with a plethora of laws and regulations attached to them. You must comply with all payroll tax requirements, including paying half of the FICA taxes (Social Security and Medicare) for each worker and collecting the other half from the employee.  According to the workplace experts at Cerity.Com, most states require workers’ compensation insurance, and unemployment insurance can be added to the list. 

Now, with independent contractors (1099 workers), the majority of the same tax and insurance requirements are shouldered by the contractor. The business owner just has to report the amount they have paid each year for that person on a  Form 1099-MISC. There are much fewer payroll responsibilities for an independent contractor than that of W2 employees. A W2 employee typically works for one employer at the employers’ workplace. The employer sets the employees’ hours, directs the worker, and dictates the work to be performed. An employee is eligible to receive unemployment benefits and workers’ compensation insurance and is covered by state and federal wage laws. Employees are also protected by workplace safety and anti-discrimination laws. They also typically receive other benefits such as vacation time and health insurance.  

On the other side of the coin,  independent 1099 contractors are predominately used for short-term projects for shorter durations. They set their own hours, work independently, control how to perform the work, and often work out of their office or home. 1099 workers do not receive any employee benefits from the business. They are contract workers hired to perform specific tasks or complete certain projects as requested in the contract. They are not subject to any of the workplace laws that W2 employees are and are not eligible for things like unemployment benefits or workers’ comp. They’re responsible for providing their  health and  liability insurance and pay individuals taxes via the 1099 form at the end of the tax year. 

Quality Vs. Cost: Who Is Cheaper To Hire? 

The cost of hiring contractors is attractive to many companies because there is less legal paperwork and administration involved. Another factor to consider is the quality of work as meeting deadlines are sometimes harder to control with 1099 workers. Employees may require more in the way of taxes, insurance, and liabilities, but the employer has more control over the type and quality of work, not to mention the time spent on accomplishing the desired tasks. Depending on the type of work performed and the workers’ salary, this option could become more cost-efficient over the long-term. 

In a nutshell, the choice once again hinges primarily on the type of business and work that is required. Independent contractors are geared more towards short-term and specific specialty projects. An example is when a company receives a big order or contract and needs greater production for a specific amount of time. Business employees are valuable to a company that wants to control and maintain their standards, train and recruit people for long-term stature, and build their own effective and efficient workforce.  

One last note of caution for business owners is to be wary not to blur the lines in the workplace between contractors and employees and the way they are governed, as this can frequently lead to complications resulting in legal issues. Make sure to thoroughly research federal and state laws and definitions before making your ultimate decision.

Ryan Kh