Pros and Cons of Hiring Contractors vs. Employees

More and more people are leaving their full-time jobs to become freelancers or independent contractors these days. In fact, experts predict that contractors will make up half of the full-time workforce by 2020. Consequently, more companies, including small businesses, are deciding to hire freelancers instead of full- or part-time employees.

As employers, you may be wondering if it would be better for you to hire contractors in place of employees, too. But, before you jump on the contractor bandwagon, you need to understand some of the pros and cons of hiring freelancers.

Pros of Hiring Contractors

• You’ll likely save money. In addition to paying wages to your employees, you also have other expenses like your share of their Social Security and Medicare taxes, state unemployment compensation insurance, employer-provided benefits, office space and equipment. When you hire contractors, you don’t have these extra expenses.
• You’ll have greater staffing flexibility. Many small businesses experience fluctuating business demands. So when your business suddenly increases or decreases, you have to worry about hiring or firing employees. By hiring contractors, they only work when you need them.

Cons of Hiring Contractors

• You’re taking on an added risk. Unfortunately, you don’t know if the quality of the contractors’ work will meet your expectations, if they’ll get the work done on time or at all, or if they’re worth what you’re paying them. This is why it’s important to have freelancers sign a written agreement that spells out all of the legal details.
• You run the risk of a government audit. Unfortunately, some businesses have been found guilty of misclassifying employees as independent contractors, so they don’t have to withhold and/or pay payroll taxes. So if any federal or state agency thinks you may have misclassified employees as contractors, you might face an audit – and a huge penalty if you aren’t classifying workers correctly. Therefore, make sure you’re properly categorizing your workers to prevent reporting and classification errors. Refer to the IRS web page, Know Who You’re Hiring – Independent Contractor (Self-employed) vs. Employee, for more information on the classification rules.

Ultimately, it’s up to you to determine if contractors or employees are right for your small business needs. But if you need assistance staying on top of the contractor-versus-employee classification rules and regulations and abiding by them, The Payroll Department can help. As a payroll service provider, we keep up on all of the latest payroll laws and let our clients know if something happens that could impact their payroll and business. To learn more about The Payroll Department’s payroll services and solutions, talk to Teresa Ray at 317-852-2568 today.

– Ariane of The Payroll Department Blog Team