Should I Hire Contractors Instead of Employees?
Your business is growing and your team needs to do the same, but hiring new employees is a complex process. Especially if you’re looking to hire out of state, maintaining all your legal requirements and compliance can get tricky. Could contractors be the quicker, simpler, and cheaper solution you’re looking for?
The answer: it depends.
Contractors vs employees is a deeply complex issue fraught with unexpected landmines, from a legal, HR, and tax compliance perspective. What we’ll cover below is just the tip of the iceberg, but it’s a good foundation of knowledge as you start making hiring decisions for your business.
The difference between contractors and employees at a glance:
| Employees: | Contractors: |
| Work for someone else’s business | Run their own business |
| Have set hours and are paid on a regular basis by an hourly, salary, or by piece rate | Set their own hours and are typically paid a flat fee on completion of a project |
| Use materials, tools, and equipment provided by their employer | Use materials, tools, and equipment provided by themselves |
| Typically work for one employer | Typically work with multiple clients |
| Receive benefits such as unemployment insurance and paid overtime and are protected by the FLSA | Do not receive the same rights and benefits as a hired employee and are not protected by the FLSA |
| File taxes with a W2 | Files taxes with form 1099 |
The governments want you to hire employees
Hiring contractors saves you from complex paperwork and the cost of social security, taxes, and benefits. Unfortunately, it’s for this exact reason that the federal government wants you to hire employees. The law is set up to encourage businesses to hire full-time employees who receive benefits like:
- Workman compensation
- Unemployment insurance
- Retirement benefits
- FMLA entitlements
- and more.
Despite this, the contract workforce continues to grow rapidly in the U.S. Many workers are choosing a slightly higher hourly pay as a contractor over the benefits of full-time employment.
“Perfect!” You might be thinking. “I want to hire contractors and people want to work as contractors. It’s a win-win!” But, as mentioned, the issue is not that simple.
Employees and contractors have to be managed differently
As you can tell from the chart above, employees and contractors are vastly different. They view their positions and their relation to your business differently and will require different styles of management.
Before 1989, Microsoft didn’t follow this rule. They had employees and contractors working in the same office, on the same equipment, during the same hours, and even taking lunch breaks together. One of the only differences was employees received benefits, such as stock options, and contractors did not.
When these stock options shot up in value, the Microsoft contractors were furious. They were doing the exact same job under the exact same conditions, but they weren’t getting the same reward. They demanded to be reclassified as employees, and what followed was an eight-year court case brought by the IRS which resulted in Microsoft cutting a $97 million check.
Don’t make the same mistake Microsoft did. If you bring contractors onto your team, your company culture has to change. All it takes is one disgruntled contractor for your business to land in hot water.
You won’t win if the IRS wants to recategorize your contractors as employees
As mentioned, the government wants you to hire employees, and they’ve designed the law to support this. There have been cases where entire industries happily operated using contractors before the IRS swooped in and decided they needed to be recharacterized.
Even if you’ve crossed every T and dotted every I when hiring a contractor, if the law gets involved, you’ll fight to keep them classified as contractors.
Of course, many businesses still decide to take this risk. They try to fly under the radar and avoid being noticed. Unfortunately, all it takes is one disgruntled worker for the whole setup to come crashing down.
It’s up to you if this risk is worth the reward.
Hiring a team of contractors could be exactly what your business needs to accelerate to another level. If you’re looking for a partner to support you on your journey and provide a finance function that gives you confidence in whatever decision you make, get in touch with us today.