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Hiring an Independent Contractor: What Businesses Need to Know

While there are benefits and drawback to almost any hire a company makes, independent contractors may pose a few unique opportunities and challenges. It is important to weigh all your options before you decide to make this change in your team. 

The Basics of Classifying an Independent Contractor 

The general rule laid out by the IRS is that an employee is labeled an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. 

There are two key points for business owners to keep in mind when it comes to classifying workers: control and relationship. Control can be dictated through behavioral or financial considerations, and whether or not a business directs how payments, profits or losses, tools used, and more. Determining a worker’s status is also reliant on the relationship with the employer. Factors like benefits, vacation time, and insurance coverage as well as the permanency of the position should be clearly defined.

For more information on the classification and rules that determine an employee versus an independent contractor, visit the IRS’s online resources. 

Is it Cheaper to Hire an Independent Contractor or Freelancer? 

The quick answer is yes, but not always. It depends largely on the functions that the independent contractor fulfills within the company. On a long-term basis, it might be more beneficial to hire a permanent employee. There are also hidden costs in potential fees and penalties to take into consideration.

Benefits for Businesses

For tax purposes, it is important to classify employees for income taxes, social security, Medicare taxes, and unemployment taxes. There must be paid by the employer for a full-time employee. For an independent contractor, however, businesses are not normally required to withhold or pay taxes on their payments.  

It’s estimated that employers can save up to 30 percent by hiring an independent contractor. A company can avoid most taxes, unemployment insurance, workers' compensation, and disability, as well as employee benefits like pensions, sick days, health insurance, and vacation time. Independent contractors are self-employed, therefore, they must pay their own taxes, Social Security, and Medicare themselves. Contractors also do not require the same minimum wage requirements and overtime mandates. 

Possible Company Costs

The main drawback of hiring an independent contractor is that the costs of misclassifying or miscalculating can be quite expensive for a business. For large companies that consistently hire a number of independent contractors or freelancers, the fines and penalties can add up to numbers that bankrupt a company. If found guilty of misclassification, companies are often found responsible for all past payroll taxes and unemployment taxes, as well as interest and penalties. It’s also an area that government administrations have been cracking down on over the last few years, so it is very important to be clear of the rules and regulations before hiring outside help. 

The best advice for a company thinking about hiring an independent contractor or freelancer is to double and triple-check all the numbers. Find a trustworthy team of experts that can help your business and add peace of mind.