If you’ve been following employment news, you’ve probably come across the case involving Uber and Lyft and how they categorize drivers on their payroll. The companies’ drivers may not fit into the categories of employee or independent contractor. In fact, they might be neither and this issue has led to litigation.
Thankfully, as a small business owner, you have just two choices when hiring: employee or independent contractor. Do you know the difference?
Determining the right fit for your small business will help you know what taxes need to be withheld and help you avoid legal trouble. Here are details that may be able to help you decide.
An Independent Contractor typically:
- Operates under a business name
- Has his/her own employees
- Maintains a separate business checking account
- Invoices for work completed
- Can have more than one client
- Has own tools and sets own hours
- Keeps business records
An Employee typically:
- Performs duties dictated or controlled by others
- Is given training for work to be done
- Works for only one employer
Typical advantages to hiring full time employees:
Full time employees work 30+ hours a week and will usually have a long-term commitment to you and your business. Most people want job security, and workers who feel that sense of “home” often go the extra mile.
The hourly wage for a full time employee is often much less since freelancers often charge a higher hourly rate. Having a full time employee means you can delegate tasks permanently to others. Also, if you want to take time off, there’s someone to keep your small business going.
Typical disadvantages to hiring full time employees:
There are certain requirements that come with having employees like the expectation of health benefits and vacation time. Salaries need to be paid on a regular schedule so you need to have a reserve of money in your bank account.
Additionally, specific payroll paperwork is legally required along with withholding your employees’ taxes, social security, and Medicare. Depending on your state, you might be responsible for your employees’ training and professional licensing requirements.
Typical advantages of hiring independent contractors:
Small business owners typically prefer to hire freelance workers and there are distinct advantages for working with independent contractors.
Although the hourly rate is usually higher, you’ll save money overall by not paying benefits or a regular salary. It’s much easier to stop working with an independent contractor that isn’t a good match than to go through the process of getting rid of an employee. You can hire the right person for the task needed so you don’t need to train them and they are responsible for their own permits and professional licenses.
Typical disadvantages of hiring independent contractors
As a small business owner, you’ll lose some control over how tasks are preformed, because you can’t closely monitor their work. You can guide them, but usually they aren’t on site. If you find a contractor that you like, they usually work on a first come, first serve basis. This means they may not be available when you need them. All copyrights will be owned by the independent contractor, unless you draft an agreement stating otherwise.
Do you have a growing small business and need funds to hire? Visit the SmartBiz website to learn how SmartBiz enables businesses to pre-qualify in 5 minutes, get pre-approved in 30 minutes, and receive funds as fast as 7 days after the application is complete.