Advantages for Small Businesses: Contractors Vs. Employees
I have owned a few different businesses over time, and I have hired employees and contractors. Through these experiences, I have come to understand why most experts lean heavily toward using contractors whenever possible.
Before covering the primary reasons to use contractors when you can, let is make it clear that this is not as simple as flipping a coin to decide employee or contractor. The Federal Government always tends to make laws that protect the employee type person since there are so many more of these than business owners. They feel that employment status is a privileged position since it provides company paid benefits and a more secure source of income for the employee. They have developed a sort of “litmus test” with certain characteristics that define the average employee. If a person matches several of these characteristics, then using the analogy, “if it walks and quacks like a duck, then it must be a duck,” if you bring a person into your company and they fit the characteristics of an employee, then the Federal Government will expect you to make them an employee, and pay them benefits, do tax withholding and employer matching, have them work regular hours, use your office equipment, etc. That is what employees do, and you and they will be required to live by the rules of employment.
For you to bring in a contractor, they must not be following the rules and conventions of employment. We identified some of these above, such as working a schedule that you set, using your equipment, having vacation time and sick leave, receiving payroll checks with government withholding, your company paying benefits, and employer contributions to Social Security, and others. These can not be a part of your arrangements with an independent contractor. They can work their own hours as long as they are reasonable for your company, work from home, pay their own taxes, submit invoices for payment of services, and a variety of other tasks that people operating their own businesses would perform. If you can structure your arrangements to fit with them being independent contractors, then you can create some significant advantages for yourself as a business owner.
What, then, are the advantages of using independent contractors?
- Performance of infrequent or irregular services—If the services you need performed do not have to adhere to a regular weekly schedule, if they are short-term, or yearly services, or someone who performs a monthly professional service such as bookkeeping, payroll, legal, etc., or as a handyman for an apartment building, and many others, a contractor might be the best solution. These people are not sitting on your payroll waiting for tasks to do when they are not needed.
- Less Administrative work—They will still submit reports on completed tasks, but you will not have them on payroll reports, making withholding payments generating W-2’s, tracking overtime or other time-consuming work. They submit an invoice, and the invoice is reviewed and paid. Very simple.
- Less Costs—Without having to pay for benefits like insurance, time off, retirement plans or other employer costs, you can save money and even pay them a little more on their contract.
- Filling Consultant Needs—As mentioned above, many professional relationships work better as contractor agreements rather than as employees. Most companies do not need a staff accountant or attorney, but that does not mean they do not need accounting or legal work done. This is a way to raise the quality of these services without having to pay them an employee salary.
- More Flexibility—This holds true for both the business owner and the contractor. They can do the work when it suits their schedule, if it is done by deadline, and you do not have to spend as much time supervising. A regular monthly or bi-weekly meeting to coordinate may be all that is required.
Just to be fair in providing a counterpoint, I have been an employer who has used contractors for years, but I have also hired employees. I prefer working with contractors when I can, and I generally find that there is a difference in mentality between people who will work as contractors and those who are employees. There is more professionalism, and they treat their contractor status as their own business and run and manage it like a business owner.
I have also worked as a contractor, and as an employee. In many ways I prefer contractor status and find that my clients have a different view of me and are more likely to allow the relationship to evolve into other services and opportunities that benefit us both. This is much less common with employees.
Once again, be careful in your decisions whether you can bring in a contractor or need an employee and consult with your legal and financial advisors to make certain that you set up contractor relationships according to the Federal Government’s requirements. And we wish you the greatest success for your business endeavors.