Employees Or Independent Contractors For Business

A small business faces one or the other dilemma because of its limited resources and capital. At particular stages of growth, you may require an extra hand but find that your cost factor is restricting. You might think of hiring a contractor instead. Whether to hire a new employee or an independent contractor is an important business decision. Both options have their own separate pros and cons.

Hiring an Independent Contractor

1. Advantages

Reduced Overhead: This means reduced costs in expenses, payroll, benefits and other overheads. It also reduces stress on covering cost revenue for a new venture.

No Health Benefits: It reduces the high costs of employee health benefits that are a huge financial burden on small businesses.

Work on Demand: It offers flexibility to the changing work demands of your company. You can do without it during periods of slow growth period.

No Training Needed: The contract work force is fully trained and highly specialized.

2. Disadvantages

Lack of Control: The contractor has the choice of control over the job being executed.

Compensation Rates: These can vary for different projects and depend on the market demand.

Legal Aspects: Classify employees and contractors correctly to avoid liability of employment tax and penalties on account of misclassification of an employee as a contractor. Go by a simple rule of thumb. If you have the right to control the means and methods by which the work is accomplished, then the person is an employee. However, if you have right to control the results of the work, then the person is a contractor. Once the understanding of classification is clear, then hire either of them after considering their implication on your business contract.

Hiring Employees

1. Advantages:

Loyalty: Employees are more loyal and have greater commitment, resulting in greater productivity.
Flexibility. Willingness of the staff to take on additional roles gives you greater flexibility in running the business besides providing learning opportunities for the staff. It is also easier to meet deadlines with committed staff.

2. Disadvantages

Responsibility: The burden of supporting an employee through the payroll is greater.

Extra overheads: With an additional work force, besides the additional pay bill, you will require bigger space and equipment, etc.

Becoming a Manager: As the staff grows in number, you spend more time in managing them and your company gets more exposed to worker-related lawsuits.

Some Additional Tips

Whether you decide to hire a contractor or an employee, do remember the following:
If the payment of contractor is more than $600 annual, report the wages on IRS Form1099-MISC to authorities. Sign an agreement putting forth the terms of your business relationship. This should include type of services, time frame, payment details, confidentiality, warranty and other work-related information.

Both employee and contractor hire agreements should include the work/product/service copyright laws to guard against misuse or leaking out the proprietary information of your company.

Hiring an employee or an independent contractor has its pros and cons. Exercise the option that is most suited for your business. Do be careful about the legal aspects of both the options.

Alexander Gordon is a writer for http://www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at $24.95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.

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