Costs of an Employee Vs. Independent Contractor

The decision whether to hire an employee or independent contractor can have serious legal and financial implications.

Costs associated with hiring a regular employee are sometimes higher than the costs of hiring someone as an independent contractor. These costs can include a variety of taxes, workers compensation and benefits. In many cases, however, it is not feasible to hire independent contractors.

Types of Relationships

One factor in the decision to hire someone as an employee or independent contractor is whether the Internal Revenue Service (IRS) will accept the employer's assessment that the worker is a contractor. A person who is under extensive supervision and control in how the job is performed is more likely to be considered an employee.

Costs vs. Benefits

Employees and contractors both have advantages and disadvantages. While costs may be lower when outsourcing, problems can arise in outsourcing production that could have been prevented if the business had hired employees. However, overhead costs and the costs of hiring management personnel can significantly increase production costs. Additionally, hiring employees increases costs through payment of employee benefits, unemployment compensation insurance, workers compensation, liability insurance and other taxes.

Tax Considerations

The IRS considers a number of factors, including looking at the entire overall business relationship, the degree and extent of the "right to direct and control," and documentation maintained in regard to the relationship. It may be wise to request an informal opinion from the IRS (using IRS Form SS-8) as to what type of relationship exists.

References

• IRS.gov: Independent Contractor (Self-Employed) or Employee?