Insureon Blog

Employee vs. Contractor: Save Money by Choosing Right

11. May 2016 08:15

business woman looking thoughtful

Let’s do a quick assessment. Are you having a hard time completing the projects you’ve contracted for? Is there more work to do than hands to get it done? 

If that’s the case, it may be time to hire help. But before you write a want ad (related reading: “How to Write a Killer Job Description in 4 Easy Steps”) or plan the interviews (related reading: “5 Interview Questions that Can Get You Sued”), you might want to think about the type of worker you want to hire.

We asked some experts to weigh in on the difference between employees and contractors. Check out their insight so you can choose the worker who's right for your business.

What’s the Difference between Employees & Contractors?

At first glance, the difference between an employee and a contractor is pretty clear. An employee works for you in an ongoing capacity. An independent contractor works for themselves and is usually hired on a per-project basis. What could be simpler?

The problem is that sometimes the line between the two gets fuzzy. Some very practical business choices can actually turn the worker you thought was a contractor into an employee, such as…

Casey L. Sipe (@CLSEmployerLaw), an employment law attorney with Caldwell & Kearns, P.C., says, “If a small-business owner hires an independent contractor but treats them like an employee, that worker is entitled to all the privileges and benefits that employees are, including Workers' Compensation coverage, unemployment compensation coverage, healthcare, sick / vacation leave, minimum wage and overtime, plus the state and federal government will seek to collect payroll taxes.”

Money-saving tip: Be sure you know the difference between your W2 employee and your 1099 contractor. Lots of people swear by “the duck test” (if they act like an employee, they probably are). However, the government is tightening up the definitions, so your better option may be to consult the IRS website.

Which Saves Me Money: Employee or Contractor?

Deciding between an employee and a contractor mostly depends on your business needs. According to Randy Johnson, CFO of the talent assessment and development company Talent Plus (@TalentPlusInc), small-business owners typically hire contractors for roles that are either not permanent or not in their primary course of business.

“For example, if you have a large enough land mass, it’s possible you could want a full-time W2 gardener on staff," he says. "Most firms, however, will still choose to hire this out to a business that does that as their primary profession.”

On the other hand, W2 employees…

Hiring an employee allows you more control over the work they do, but part of the deal, says Johnson, is the potential cost.

“W2 employees are often viewed as more expensive to hire because the company pays a similar rate but is also required to offer benefits and to pay payroll taxes,” he notes.

Each type of worker also brings different insurance issues, too. Employees are typically covered by your General Liability Insurance and your Professional Liability Insurance, although you may have to update your policies to reflect your growing staff. Additionally, most states require you to also carry Workers’ Compensation for your employees.  

Insurance can be a bit trickier when working with independent contractors. Granted, you usually aren’t responsible for a contractor’s on-the-job injuries, but you can be held liable for the work they do on behalf of your business.

Money-saving tip: Independent contractors may be the more cost-effective option if they temporarily help out with work that isn't central to your business. You save on taxes and benefits, and you usually don’t have to supply contractors with equipment or space to work.

The sticking point may be the insurance. Before you hire a contractor, see if they have General Liability and Professional Liability coverage. Simply ask them for a copy of their Certificate of Liability Insurance. If they don’t have one, you may want to take your business elsewhere (related reading: "Why Contractor General Liability Insurance Is BYO-Risk.")

Tags:

Contractors | HR | Professional Liability Insurance | Small Business | Small Business Risk Management | Tips for All Small Businesses | Workers' Compensation Insurance

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