Employee versus contractors – what’s the difference? Many small businesses need help but aren’t quite sure whether they should hire an employee or a contractor. There are several financial considerations and implications to assess about hiring employees versus contractors for your business. The choice you make can impact your budget, project timelines, level of control, and legal risk.

Understanding IRS guidelines on employees versus contractors

The Internal Revenue Service has guidelines around how companies classify employees and contractors, and it’s important for businesses to comply with those guidelines. Misclassifying an employee as a contractor, whether intentionally or unintentionally, can result in the IRS fining the company. Companies that make this mistake may be required to pay federal employment taxes owed.  

Much of the IRS guidelines focus on:

• the level of control that the employer has 
• the way they are paid
• if they use company-provided tools to complete the work
• the length of the contractual engagement

Key considerations for hiring employees

Are you hiring an employee? Consider the cost of their salary and the cost of their total benefits package. Be sure to include: overtime, paid time off, retirement, health insurance, maternity leave, short-term disability, and more. There’s also the cost of office space, technology, and supplies to consider. 

The decision to hire an employee should also consider the structure and needs of your business. Someone at your company needs to set their work schedule, job duties, and expectations. An employee typically works a set number of hours each week. But, you’ll also need to determine if they are exempt or non-exempt, otherwise known as salaried or hourly. 

There’s also the risk factor of being responsible for an employee’s well-being while they are on your business’s property during paid work hours, which means you’ll likely need workers’ compensation insurance as well.

Key considerations for hiring contractors

Independent contractors come with their own set of financial considerations and implications. 

One of the biggest differences between an employee and a contractor is scope of work. Employees will generally take on a broader scope of work that can shift and change depending on the need. A contractor’s scope of work will generally be outlined in a contract before any work begins, and only the items set forth within the contract will be completed. If you want or need additional items or need to change the scope of work, that means modifying the contract and increasing the amount paid to the contractor. 

When used appropriately and strategically, independent contractors can bring advanced expertise to your business for less than the cost of hiring a full-time employee. Many contractors have worked in their industry for many years and bring extensive knowledge to the table. They can also help fill the gaps as your business grows. For example, you may start with a contracted bookkeeper and then ultimately grow large enough to hire an in-house bookkeeper.

Employees versus contractors – the best fit for your needs?

If they need to be physically present to achieve set goals or manage other staff members, employment is the best option. If the scope of work is intermittent, project-based or can be done remotely with little to no supervision required, an independent contractor would be your best option. Some employers will also hire contractors for a short-term project with the understanding that they may potentially become an employee if the project progresses. 

When weighing the financial considerations and implications of hiring employees versus contractors, the decision should be based on your business’s immediate and future needs and the regulations set forth by the IRS. That approach will protect your company in the long run and reduce the risk of legal hassles or fines.

If you’d like to connect to learn more about this issue or if you have other bookkeeping questions, feel free to reach out to me via phone at (425) 417-9057 or via email for a 30-minute complimentary consultation.