Advantages and disadvantages of the employee vs. contractor question

Many startups choose to hire independent contractors instead of employees for certain jobs. Though this has always been the case for startups and small businesses, a recent trend of larger companies more aggressively hiring contractors has sprung up. This is especially true for companies who tend to have off-site staff.

There are many advantages to hiring independent contractors as part of your staff. Two common advantages are flexibility and to close a skills gap. Some recent research from Elance revealed that 70% of survey respondents would hire freelance workers to close skills gaps and spur growth in their business. You can hire as needed when you have a specific project to do, or to handle a large new account. “The ability to hire the best available person online and on-demand is becoming an essential strategy for agile businesses of all sizes,” said Fabio Rosati, CEO of Elance.

Although the hourly rate will seem high, saving costs overall in the long run is another advantage. Because independent contractors are already somewhat or very experienced in the tasks which they are hired for, you will spend less time in training and spend less money on benefits and perks. Since contractors mostly work off-site, saving on real estate costs is also a consideration.

But before you stop hiring employees and switch to contractors, keep in mind there are a number of disadvantages as well. One of the downsides to hiring independent contractors is that by the nature of the relationship, they are often short term hires. This means that if you do have a reoccurring job you need to hire for, you may be dealing with the constant management and hiring of several different people for one position. Independent contractors also may maintain significantly more control over how they work and the intellectual property which results.

Above all, the biggest challenge of hiring contractors is actually determining whether your hires are really independent contractors or de-facto employees. Incorrect categorizing of employees as contractors can lead to severe IRS penalties and fines, including the loss of business licenses. Companies big and small often get tripped up with this difficult distinction. The now infamous example of this is ridesharing startup, Uber, recently in the news on a variety of issues ranging from employee/contractor compensation to liability insurance. Various parties are questioning whether the people driving the cars may actually be employees or not.

For the IRS, this distinction goes far and wide. Even when both the employer and the contractor agree on the nature of their relationship, the IRS may see it differently.

To determine whether someone is an employee or a contractor, the IRS looks at several things. The most important is called “behavioral control.” This considers how much control an employer has over the individual’s performance and working conditions. This can include the following questions:

• Does the individual work on location or at a location of his/her choosing?

• Whose equipment is used in the work?

• Is training provided by the employer?

Financials are investigated to discover other differentiators, such as the extent to which the individual has unreimbursed business expenses, and how the employer pays the individual. The IRS will also examine the parameters of the relationship starting with the contractual agreements.

To determine the difference between individual contractors and employees for 2015, consult a professional or check out the publication for this topic from the IRS.