Permanent Vs. Temporary: The Pros And Cons Of Employees Vs. Contractors
Category: Business Growth Strategies
Posted: July 2014
As a small business owner, it's important to be aware of the advantages and disadvantages of working with an employee versus working with a contractor. Correctly classifying the people who work for you will help you figure out how much you owe in taxes, the amount of withholding required from your workers' paychecks, and tax documents you might need to file. Making sure those who work for you understand their statuses will also help avoid complications and misunderstandings they may have regarding their positions.
DETERMINING THE DIFFERENCE
To start, the difference between an independent contractor and an employee might not be as clear-cut as it initially appears. In an effort to help workers evaluate their own employment status, the IRS issued Publication 1779, which works to determine classification through three areas: financial control, behavioral control, and the relationship of the parties.
Financial control: Encompasses the facts that show whether there is a right to direct or control the business part of the work; for example, if you're not reimbursed for business expenses, or have the ability to earn profit or incur loss, it's likely that you're a contractor.
Behavioral control: Forbes writes that a worker "is an employee when the business has the right to direct and control a worker. The business does not have to actually direct or control the way the work is done - as long as the employer has the right to direct or control the work." Receiving detailed instructions is usually another way to determine whether you're an employee or contractor, as the latter is typically told what should be done, but not how it should be done.
Relationship of the parties: If a worker receives benefits, including but not limited to insurance, paid leave, or a pension, he or she is likely an employee; however, the absence of said benefits does not necessarily indicate contractor status. A written contract is also a helpful way to differentiate, as the terms and language used within should help determine an individual's position.
THE PROS AND THE CONS
As with many things in business, there's no clear-cut answer as to whether engaging someone as an employee or contractor is more advantageous. Some pros that come from hiring an employee include a better workflow, greater flexibility in regards to job roles, and the loyalty that comes from being a member of the organization. Cons include the extra overhead that comes with benefits and payroll, the burden of ensuring the financial wellbeing of both your employees and yourself, and the shift into a greater managerial role for the business owner that can distance them from the work itself.
Contractor pros include the reduced overhead that comes from not having to worry about benefits or payroll (with the lack of medical benefits being especially notable), and the added flexibility that comes with hiring workers for busier times or special projects, and that allows for greater cost control during slower periods. Some cons of this approach are the lack of control that comes with employing contractors, the lack of fixed rates, and the tax penalties that come with worker misclassification.
As of September 1, 2014, the following minimum wage changes will go into effect for Michigan:
The minimum wage for Michigan workers is raised to $8.15 per hour, effective September 1, 2014. Tipped employees may be paid 38% of this wage, or $3.10 per hour. If the tips received plus the tipped employee minimum hourly wage do not equal or exceed $8.15, the employer must pay any shortfall to the employee. A training wage of $4.25 per hour may be paid to employees 16 to 19 years of age for the first 90 days of their employment. Minors aged 16 and 17 may be paid $7.25 per hour, which is the current Federal minimum wage.
As always, please feel free to give us a call with any questions or concerns you may have regarding whether employees or contractors are right for where your business is now.