Employer’s choice: employees or independent contractors?

Whether you’re an ambitious entrepreneur or an industry titan, you have an important choice when building or expanding your workforce. Do you recruit employees – individuals who will build value by championing a business objective long-term? Or do you bring in contract workers – experts who will jazz up, prune, fix, build, (or do anything else you want), and then leave?

For some, like entrepreneur Devante Blackwell, contractors provide optimal flexibility – an important feature when your business is competing for lucrative contracts.

“We work with independent contractors - hair and makeup artists, cinematographers, and things like that,” says the director and CEO of Captivating Cinema.

“What we do depends on the project. If you need a crew of six, we come together with a crew of six. If you need a crew of 50, we come together with a crew of 50. We do it based on what’s needed for each individual project and based on the budget.”

Before you decide for yourself which suits your business, here’s what you need to know.

Isn’t every ‘worker’ an ‘employee’?

From a tax standpoint, the answer is no. Employees are individuals whose earnings are taxed according to the provisions of the IRS’s W-2 form. They are the full- or part-time workers who are hired by you without an end date. If they are laid off, they would usually be eligible for unemployment. 

As their employer, you are responsible for defining the type, method, and schedule of an employee’s work. You also provide the equipment, office space, and training needed to perform that work safely and adequately. In short, you tell them what to do and how to do it. 

Independent contractors are self-employed, sole proprietors, or contingent workers whose tax obligations are tracked by the IRS’s 1099 form. You don’t withhold taxes from the money you pay them – you pay them like any other vendor and they have to deal with the tax man on their own. By definition, they have an ‘end date’ - it’s negotiated before they begin. And once they are gone, they are gone. They cannot make an unemployment claim. Their ‘payroll’ is that invoice they send you for services rendered. Technically, you can tell them what to do but not how to do it. 

You can’t demand that a contract worker put in overtime or come in to address workplace emergencies. Their time is their own. But you can expect them to take some hefty business expenses off your shoulders: office space, equipment, insurance, incidental travel, and other overhead.

That said, many things are negotiable. For instance, as a matter of convenience, some contractors – like accountants or HR professionals - are invited to perform their work at the company offices. And if you want your contractor to fly to Fiji to complete an assignment, expect to see that on your invoice. Find out more from the IRS: Independent Contractor or Employee?

The case for contractors

• If your business is in a growth mode, using independent contractors can offer some distinct advantages. 
• You can pursue new projects or build out new business capacities without committing to a new staff position.
• A specially skilled freelancer can help you tackle a tough project, like setting up payroll, or bridge a gap that doesn’t warrant a full-time position on an ongoing basis.
• The independent contractor market is flush with talent from virtually every field imaginable – from accountants to SEO marketers.
• Freelance aggregators like Upwork can quickly and easily connect your business to a talent pool that spans more than 3,500 skills.

If you want to recruit contractors directly, UpCounsel’s seven-point hiring guide can show you how. Contract workers require little or no training, do not add to your tax burden, and may not even require supervision. Ultimately, this can free up resources that can be plowed back into your business. That was May Silvers’s experience.  

“I always have contractors. It’s not because I don't like having employees; it’s because I understand how business works,” says the founder of M2 Hospitality, an event planning service, and Events4Anyone, a coaching service that helps other event planners launch their businesses. 

“Now that I have grown M2 Hospitality, there's no need for me to have a full-time employee. I have virtual assistants. I have contractors. For Events4Anyone, we're on the path of hiring full-time employees. So I see the pros and cons of contract and permanent workers. It all depends on the nature of the business.”

Investing in a new colleague

The allure of adding an employee to your team is undeniable. Their loyalty, dependability, and knowledge of your company culture are invaluable assets. The tipping point may be the price you pay for these benefits.

According to the Small Business Administration, the true cost of hiring a new employee currently ranges between 1.25 and 1.40 times their annual salary, depending on the size of any benefit packages and other onboarding expenditures. So that new administrative assistant you budgeted for $35,000? They will set you back $43,750 to $49,000.

Related: How much does it cost to hire an employee? 

A combination of mandatory and optional add-ons is what drives the math here. Things like payroll taxes, workers compensation insurance, health insurance and other benefits, recruiting, and onboarding and training costs are the hidden hurdles that every employer must tackle. The Small Business Administration (SBA)’s article,  How to hire employees, can give you a great overview of the process.

Managing the mandatory - strategically

Some of these costs can be managed down – like paying for some (not all) of your employee health care. Or reining in the generosity of your benefits package. 

But even these measures can backfire. If your starting salary is not as high as you’d like, a great benefits package might be the thing that lures that hot prospect away from your competition. Do you want to gamble otherwise?

And then there’s this: if you are a small business that pays for at least 50 percent of your employees’ health coverage costs, you are eligible for a tax credit from the IRS.  Again – more financial leverage for your business, without losing the advantage that health insurance gives you in a tight labor market.

Of course, there are some costs that cannot be avoided and you shouldn’t try. Payroll taxes are a fact of life. Workers comp insurance is mandatory in all states but Texas. And, if your business has more than 50 full-time employees, federal laws require you to offer health insurance and unpaid family and medical leave benefits. 

Related: Workers compensation insurance: Who needs it and how does it work?

But did you know most of these costs are tax deductible?

And, your workers comp and unemployment taxes? They are both partially indexed to the number and size of your previous claims. The safer and stabler your workforce is, the less you will pay to keep them that way. Find out more about your tax options in The IRS Employer’s Tax Guide to Fringe Benefits.

Partnering smart to spend smart

You don’t have to go it all alone. Hiscox has been safeguarding the dreams of entrepreneurs like you for more than a century. We understand what you’re up against, and we know what you’re after. Talk to us about finding the right general liability and professional liability insurance coverage for your business. 

And the answer is…

At the end of the day, a sober evaluation of your own business needs will put you in good stead. Many decide both types of hires have a place in their business plan: contractors to explore the possibilities, and employees to ensure stable growth. That’s what Thana Sakas, president and owner of Gramercy Consulting found:

“I don't enjoy the details as much. I'm much more of a strategic player. So I hired a bookkeeping firm that handles all of my accounting practices -  my bookkeeping, my invoicing. And I subcontracted to an executive assistant that handles all of my scheduling and does some other things for me…I subcontracted to another coach when my business started to grow to a point where I couldn't take all of the work that was coming to me. I brought on another coach who now takes on some of that extra work.”