Employee or Independent Contractor? Which is Better?

When looking to acquire more talent, savvy companies seriously consider both options – hiring a full-time employee or engaging an independent contractor.

Many, but certainly not all, companies need some full time staff for a base level of work and to maintain consistency. Moreover, many companies, especially service companies, have workload peaks and valleys. When this is the case, it can be very expensive to staff up for peaks, and carry staff during the valleys. Therefore, smart organizations use a mix – a base level of employees that still will all be utilized during the valleys, and contractors to supplement staff during peaks.

What’s the best definition of independent contractor? The IRS website puts it very simply: independent contractors are self-employed, and provide invoices for services rendered.

It is ultimately between the person and the company hiring in terms of which makes the most sense. Which is usually best? It depends on a number of factors, and this article can be helpful for people in the process of deciding that for themselves.

An employee is an actual part of the company, whereas the independent contractor is self-employed. If one enjoys consistency and being a part of an organization, full-time employment could be best for him or her. Other positives include health benefits, vacation pay and other perks.

An independent contractor often doesn’t know where his next job is coming from, and that makes some people concerned. Other potential negatives of being an independent contractor include having to get your own benefits, having to use your own equipment, and even having to pay for your own specialized training, if necessary. Also, an independent contractor does not have the protection of a human resources department, should an issue such as discrimination or harassment arise.

On the flip side, highly successful independent contractors typically earn a higher rate (often significantly so), and they have the freedom to choose when they want to work, in what part of the world they want to work, and for whom. They can also pick and choose which projects they want to work on, and the challenge of the project is the biggest perk for many independent contractors.

Some independent contractors also like the allure of being their own boss. They like the idea of not taking supervision from others in terms of how to do their job – or even the number of hours that should be spent on a project.

From a tax standpoint, independent contractors must provide a signed W-9 tax form, and because they are not actually employed by the company, they are not eligible for any benefits as mentioned earlier. They also have to pay 100% of their FICA taxes, while companies must pay half of the FICA taxes for their full-time employees.

Often, employers use staffing companies to acquire contractors. Though it costs a little extra money to do so, it eliminates the headaches of human resource issues, because the worker is actually working for the staffing company rather than the employer – with paychecks coming from the staffing company. For the employee, it’s not a bad thing, either. The staffing company takes out taxes and the employer pays the “middleman” fee of linking themselves with the employee via the staffing company.

It can get tricky if a person is misclassified as an independent contractor, when, in the eyes of the law, he’s considered an employee. For example, if you are treating a contractor like an employee, e.g., requiring him to come to regular meetings, providing his equipment, having him work 40 or more hours a week, this is illegal. Employers can get into some serious hot water and have to pay significant wages, benefits and penalties as restitution for their misclassification.

Perhaps the best short answer on how to determine whether someone is an independent contractor or an employee comes from the U.S. Small Business Association. Employers unclear about potential misclassification would do well to read this information, and possibly to engage an attorney to be as sure as possible.