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The growth of the contingent workforce since the pandemic has created a flurry of new talent options for businesses. As more people choose to work as independent contractors, companies can save money on hiring, recruiting, and employment costs while still accessing deep expertise in a particular field.

What Is an Independent Contractor?

Independent contractors, including freelancers, contingent workers, and consultants, are self-employed individuals who provide specific services for an agreed-upon fee and during a particular time frame.

What Is an Employee?

An employee is generally economically dependent on an employer for work and wages. The employer determines the hours worked, sets the schedule, and provides direction on how the work should be completed. An employee may be full-time or part-time, or even seasonal or per diem, and can be protected by federal, state, and local employment laws.

What Are the Differences Between an Independent Contractor and an Employee?

For federal tax purposes, the IRS uses a test that considers behavior, financial, and relational factors to determine whether a worker is an employee or an independent contractor:

  • Behavioral: Does the business control how and when the worker does their job?
  • Financial: Does the business control when and how the individual is paid and which expenses, if any, are reimbursed by the business?
  • Relationship type: Does the worker have a written contract or receive benefits such as sick leave, paid vacation days, or health insurance? Is the relationship ongoing or finite in length?

Tests under the National Labor Relations Act, Title VII of the Civil Rights Act, the Fair Labor Standards Act, and other federal, state, and local laws also offer guidance to help you correctly classify workers when applying those laws. Worker misclassification can result in significant violations and penalties under applicable laws from enforcing agencies, so be sure you understand all the applicable requirements.

Here are some of the potential differences that may exist between an independent contractor and an employee:

Independent Contractor Employee
Controls own schedule Employer controls schedule
Sets pay rates Employer sets pay rates
Controls when and how work is done Employer determines work priorities
Responsible for all tax obligations Employer pays a portion of employment taxes
Uses own tools and equipment Employer provides the tools and equipment needed
May earn a profit or experience a loss based on business performance Does not experience profit or loss based on business performance

 

Advantages and Disadvantages of Using Independent Contractors

In an increasingly competitive labor market, independent workers can help you fill talent gaps without the expense of hiring a full-time or part-time employee, depending on the amount of control you intend to give that worker.

Advantages

  • Cost savings: Independent contractors can deliver quality work at a fraction of the cost of hiring a full-time employee. These cost savings can be significant, especially for unique or complex skill sets.
  • Access to specialty expertise: Independent contractors often differentiate themselves by becoming proficient in niche markets. They can give you access to unique expertise and proficiency that your team lacks.
  • Increased bandwidth: If you face an impending deadline for a specific task or significant project, a contractor can relieve pressure on your team and help you stay on track.

Disadvantages

  • Lack of company knowledge: Some jobs require knowledge of your internal processes, culture, or teams that a contractor lacks.
  • Decreased control: Businesses have less control over when and how a contractor works than they do for an employee. If you need someone to be available or on call during business hours, a contractor may not be the right choice.
  • Risk of misclassification: Misclassifying workers as independent contractors when they should be considered employees (or vice versa) could result in steep penalties. Classification can be tricky depending on the worker’s specific responsibilities, which can put you at risk of mistakes.

To read the full article, visit paychex.com/worx

To learn more about how Paychex solutions can benefit your franchise visit go.paychex.com/IFA

 

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