An independent contractor contract is important to distinguish contractors from regular employees.
Misclassifying an employee as an independent contractor makes the employer liable for employment tax, interest and penalties.
Although both are working under one employer, there are important differences between the two.
For one thing, an independent contractor is considered as a separate company that is hired to provide certain services.
An employee on the other hand is considered a part of and under the supervision of the company. Employers need to withhold income taxes and pay for Social Security taxes and unemployment benefits.
The debate over hiring an independent contractor or an employee has its own merits but overall would depend upon the need of the employer.
Here are some of the advantages and disadvantages of the two.
Advantages of hiring an Independent Contractor
No Health Benefits Since independent contractors are generally considered as their own company, the employer is not required to provide the same health benefits that they provide their own employees.
Reduced Overhead Hiring independent contractors entails less cost in terms of payroll, benefits, etc.
Work on Demand It gives employers some form of flexibility by being able to take on new work demands as they come. Contractors are also usually highly specialized in the specific work the employer needs.
Disadvantages of hiring an Independent Contractor
Lack of Commitment An independent contractor may be working on several projects at one given time so their time does not exclusively belong to the employer.
Lack of Control Employers usually do not have any control over the process of how the contractor performs his job. The employers authority only extends upon the result.
No fixed rates An independent contractors rate may vary from project to project depending on the market and the scope of the project.
Advantages of Hiring an Employee
Loyalty Employees are generally more loyal to the company than contractors. The sense of belonging to the same organization can result to better productivity.
Flexible roles Employees, especially in small organizations, usually perform multiple functions compared to the specialized work of contractors.
Consistent workflow With continuous operation, coordinating project requirements are much easier than coordinating different contractors for one project.
Disadvantages of Hiring an Employee
Extra Overhead Costs Compared to independent contractors, employers must consider a higher overhead cost when hiring employees. Aside from the payroll and employee benefits; you will also have to consider moving to a bigger office and purchasing equipment.
More Responsibilities Hiring employees entails supervision and management compared to hiring an independent contractor. Aside from that, the company would also have to make the payroll that includes corresponding deductions like social security taxes.
Risk of Lawsuits The risk of being sued for employment discrimination is greater when hiring an employee. Under the law, employers are required to provide employees with a workplace that is free from discrimination and harassment.