When it comes time to hire extra staff at your organization, you have two choices, hiring a contractor or an employee. Here’s a look at the pros and cons of both.
Here's what you need to know:
- Employees work on projects or services under the direction of a hiring manager or direct supervisor
- Independent contractors are self-employed workers and not a part of your in-house team
- Hiring an employee is best if you have year-round needs for their services
- Contractors are a good choice for specific jobs and skillsets or if your needs are seasonal and you don’t require year-round staff
Hiring for the needs of a new business or to grow an existing business is time-consuming, challenging, and often confusing. If you are looking to bring on staff at your business, you have a few options such as hiring interns, part-time workers, full-time employees, or temporary help.
But, how do you know when it’s right to hire a contractor or an employee? To help you decide who to hire, let’s take a look at the difference between the two.
What’s the difference between an employee and an independent contractor?
The Bureau of Labor Statistics reported that employee compensation costs in the United States averaged $39.55 per hour. Breaking down this amount, 69.1% or $27.35 per hour was attributed to wages and salary and 30.9% or $12.20 per hour was attributed to benefits.
Employees work on projects or services under the direction of the hiring manager or direct supervisor. For example, if you dictate what type of work is being done and how it’s completed, then that person is an employee. Your employees are on your payroll and work a set number of hours per day in return for an annual salary or hourly rate.
Independent contractors, on the other hand, are self-employed workers and not a part of your in-house team. According to the IRS, “an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.” That means an independent worker is free to set the days and hours they work once a contract of agreed-upon services has been set.
Difference between 1099 vs. W-2 employees
There is another important distinction between the two types of workers. Employers pay Medicare and Social Security taxes and withhold income taxes from the employees’ paychecks. However, you typically don’t pay or withhold any taxes on an independent contractor’s payments, and their earnings are subject to self-employment taxes.
One thing is certain in business: At the end of the fiscal year, the IRS wants to make sure you paid all required taxes. As an employer, you have until January 31st to submit W-2s to your employees or 1099s to any independent contractors you worked with. This date extends to the next business day if the 31st falls on a weekend.
You must send a W-2 Wage and Tax Statement to all of your salaried or hourly employees, which is a record of all wages paid and taxes withheld. You used to report independent contractor payments on form 1099-MISC, but as of the 2020 tax year, self-employment income is now reported on a 1099-NEC. In other words, if you paid any contractor $600 or more during the year, the IRS requires you to issue a form 1099-NEC to report their nonemployee compensation.
You are also required by law to send a copy of all employee W-2s to the Social Security Administration. The IRS recommends submitting these forms electronically, and you’re required to do so if you have more than 250 employees on your payroll. The electronic filing rule also applies if you are issuing more than 250 form 1099s. This threshold may be reduced in later tax years.
Employers pay Medicare and Social Security taxes and withhold income taxes from the employees’ paychecks. However, you typically don’t pay or withhold any taxes on an independent contractor’s payments, and their earnings are subject to self-employment taxes.
Contractor vs. employee: pros and cons
Here are some of the pros and cons to consider when you’re thinking of hiring a contractor or employee.
Employee pros and cons
As your company continues to grow, it may make sense to bring on more in-house staff.
- Employees typically work for a single employer.
- They help you build a stronger workforce, as in-house employees feel like they are part of the team.
- Long-term employees have greater familiarity with your business, products, and services.
- You’ll spend more time hiring, onboarding, and training.
- Employees bring higher costs due to yearly salary, healthcare benefits, the employer share of taxes, and other expenses.
- If an employee turns out not to be a good fit, replacing them could be a drain on your resources.
Independent contractor pros and cons
When you don’t have staff on hand to handle an urgent task or need a worker with specialized skills, you may want to hire a contractor.
- Contractors are flexible to hire for services only when you need them.
- Hiring can be quicker since they don’t have to go through a tedious onboarding process.
- Payroll is easier as you don’t have to deduct taxes or pay the employer portion.
- Contractors can be a cost-effective solution as you’re not paying for health insurance, long-term disability, PTO, and other benefits.
- You have little to no control over when they work.
- They may not be available when you need them.
- Contractors have less company loyalty since they may work for multiple organizations.
- You may face delays in deliverables while they work on other jobs.
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Choosing the right one for the job
So now that you know the difference between an employee and an independent contractor, how do you know which one is right for the job?
Hiring an employee is best if you have year-round needs for their services. If you have an e-commerce website that sells products 24/7, then you’ll probably need permanent, full-time help. Hiring an in-house team of copywriters, graphic designers, web developers, and customer service reps is key to keeping your site up and running.
Contractors are a good choice for specific jobs and skillsets or if your needs are seasonal and you don’t require year-round staff. For example, if you sell Medicare insurance, you probably need extra help during the annual enrollment period. You can hire temp agents, content writers, and social media coordinators to help out with your sales and marketing efforts during this busy time.