Portrait of successful young business team posing in office. Concept: contractor vs employee: what's the difference?
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Contractor vs Employee: What’s the Difference?

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Hiring new talent is vital for the growth of any company. An employee or a contractor can bring fresh ideas and different points of view to the business. However, the rules are different to hire one or the other. In other words, you have to be aware of the contractor vs employee designation.

There are parameters that distinguish them legally, and sanctions if you don’t comply with the designated laws. In this article, you will learn how to differentiate a contractor from an employee, how to know which one is the best fit for your company, and how to find the best candidates.

Contractor vs Employee: What Is an Employee?

According to the IRS, “anyone who does a job for you is your employee if you can control what they will do and how they will do it“.

In other words, for a worker to be considered an employee, they must be subject to the control that the employer exercises over them, in terms of how the job is performed, where and when, etc.

Employees usually receive training and they are provided with the equipment and materials necessary to perform their work.

Furthermore, employees receive benefits paid by the company, such as insurance, contributions for their retirement, paid extra time, and social security, among others.

Likewise, the company must withhold taxes on the income of workers classified as employees, social security and Medicare, and comply with other local and state taxes.

It’s important to make a distinction between full-time employees and part-time employees. The former can work between 30 and 40 hours a week and are entitled to receive all the benefits mentioned.

In contrast, part-time employees work a fraction of these hours and have fewer compensations, as they do not receive paid vacations or holidays, nor benefits such as health insurance. Therefore, it is cheaper to hire part-time employees.

Advantages of hiring employees

  • They feel more committed to the company. Full-time employees are loyal to their company, they feel part of a team, and strive to meet the business goals.
  • Their salaries are usually less expensive. As employees have social security and other benefits, their hourly wage is usually less than that of an independent worker or contractor.

Disadvantages of hiring employees

  • Additional costs. In addition to paying a salary, you must cover other expenses of your employees: health insurance, paid vacations, unemployment tax, etc.
  • More paperwork. Sometimes you must fill out the professional licenses of your employees, depending on the state. And of course, you have to deal with tax documents, such as Form W-2, used to report the income and withholdings of the employee.

Contractor vs Employee: What Is a Contractor?

Unlike an employee, you can not control what a contractor will do, nor how they will do it. In other words, when you hire a contractor or independent professional, you can only control the outcome of their work and not the way they execute it. Basically, you assign the tasks to be completed and set a deadline.

A contractor has the freedom to decide who to work for and can have several employers at the same time. They also set up their own work schedule and use their own tools.

Companies are not required to withhold taxes from contractors, nor to pay taxes or fees for their social security, health plan or other benefits. However, they must report their income to the IRS using a Form 1099-MISC.

Independent workers are responsible for paying federal and state taxes. 

Advantages of hiring contractors

  • They perform short-term jobs. Contractors are professionals with specific skills, and sometimes they are the only option to cover a specific task during a specific timeframe.
  • It’s cheaper to hire them. On the one hand, you don’t need to invest money in seeking, hiring and training full-time employees. In addition, you don’t pay taxes on a contractor’s salary, social security or other compensations.

Disadvantages of hiring contractors

  • They are not truly part of your team. A contractor is not going to feel part of your business as much as one of your employee will. Most of the time they will limit themselves to do the job assigned, without going the extra mile like a member of your team might go.
  • You don’t have much control over their work. You can merely provide guidance, rely on the skills and expertise of the contractor, and trust that the final result will be satisfactory.

Contractor vs Employee: When Should You Hire One or the Other?

Making this decision may not be easy. Check the scenarios below to decide whether you need a contractor or an employee:

 

You should hire an employee if …

You should hire an independent professional if …
The work needs to be supervised The work does not need much supervision
You must control the hours allocated to work, how it is executed, and the tools that will be used It is a short-term job to be completed within a certain period of time
You have to perform long-term tasks You need a professional with specific skills that nobody else has in your company
It is a vital job to guarantee the proper operation of your business The work is not directly linked to the main purpose of the business

 

How to Hire an Employee

Finding the right candidate is not always easy. The perfect match for your company has to have the skills and experience necessary to perform specific functions, fit into the assigned team, and be willing to do whatever it takes for the success of the company. But finding this person is not impossible. These tips will help you:

  1. Identify what you need. What is exactly the position to be filled? What tasks have to be executed?
  2. Define the profile of the candidate. Determine the skills the candidate should have, level of experience, and other qualities that could be useful.
  3. Define the hiring process. Before starting the selection process, you have to refine certain details: how will you publish the job offer? How will you process the applications? Who will do the interviews? Who will decide who gets the job?
  4. Publish the job offer. Use your local newspaper, your network of contacts, your website or social networks (especially LinkedIn) to post the job offer.
  5. Review the applications of the candidates. If you have a Human Resources department, they should be the ones in charge of reviewing the resumes of the candidates. Otherwise, you can meet with trusted employees to check the applications.
  6. Interview with the most qualified candidates. After reducing the list of possible candidates, set up an initial interview with the most outstanding ones. Select the most qualified, and schedule a second interview. During this stage, review the background and references of the selected candidates.
  7. Hire the chosen one. Once you reach this step, you should be able to make an informed decision and hire the person who meets your requirements.

 Keep reading here 5 additional tips to hire employees

How to Hire a Contractor

Contractors can work on small projects, they don’t need supervision, and they don’t receive benefits like social security. For these and other reasons, many business owners prefer to hire contractors instead of full-time workers.

However, you still have to select your candidates carefully. Here are some recommendations if you want to hire an independent worker:

  1. Evaluate your needs. The type of contractor you’ll seek will depend on the type of task you need to complete, such as specific projects that require specialized skills.
  2. Make a budget for the project. Hiring independent professionals is cheaper than hiring employees, but it has its costs. Make sure you have the necessary budget to pay for the fees, and if you don’t have enough capital, consider external financing, as a small business loan.
  3. Specify what you are looking for. Do you need an engineer, a marketing expert, or an accountant? In your job offer you must specify as much as you can what kind of skills you are looking for and the level of experience the candidate must have. You should also specify the hourly rate of the contractor or the total rate for the whole project.
  4. Publish the offer in the right place. If your business has a website, you can publish your offer there, and also on your social media. There are also specific platforms where companies can post their job offers and contractors can offer their services. Also, take advantage of your local newspaper, or make use of public places (like a community house or a library) to post your job offers.
  5. Interview the candidates and select the right one. It’s better if you can meet in person. This way it’s easier to assess their capabilities and their character. If you don’t have this possibility, try to schedule a video call and ask them all the necessary questions. Don’t forget to check your references. Some platforms include reviews and ratings from previous employers. This will allow you to know more about the candidate’s experience and judge their skills better.

Platforms to find contractors

Sites like Upwork.com or Toptal.com allow you to search for independent professionals in areas such as design, marketing, writing, or finance.

The problem is that, in many cases, you don’t get to meet the candidates in person, since they work remotely from other states or even countries. You can only contact them through video calls or emails.

If you are hiring temporary employees to attend the increasing demand during the peak season or the summer, you can use specific platforms such as Coolworks.com or Seasonaljobs.com, where it’s also possible to find contractors. Have in mind that some of these websites charge for posting job offers.

 Learn here all you need to know to hire employees during the peak season. Are you interested in hiring students? If so, keep reading here.

Contractor vs Employee: A Final Recommendation

Hiring staff does not admit mistakes and you have to comply with the law. From the get-go, you must be sure of the type of professional you need for your company and avoid any mistakes through the hiring process.

These mistakes happen frequently, like assigning a contractor the responsibilities of a full-time employee, but still with the salary of a contractor. This situation could make you responsible for paying taxes on this worker’s employment, as well as interests and fines.

If you are not sure of the status of any of your workers, you can submit Form SS-8 to the IRS to evaluate the circumstances of this professional, and determine their status in your company.

To hire an employee or a contractor you need to invest time and money. Any of these professionals can add value to your business, but depending on your needs you must define which is the best alternative.

We hope you have learned how to classify the different types of workers, and that you are aware that the law requires a clear delimitation between contractor vs employee. Don’t forget that you have to carry out a thorough selection process before hiring any worker and that there are specialized platforms that can help you with this task.

ADDITIONAL READING: How to hire employees for your small business

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