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The vast majority of workers are hired as traditional payroll employees, also known as W-2 employees. An employee is placed on the employer’s regular payroll and receives a steady paycheck. The employer withholds state and federal taxes from each paycheck and pays for the employee’s health insurance. Benefits such as paid holidays, vacation and sick days are also provided.
In this relationship, the employer provides the employee with all the necessary tools, equipment or supplies to do the job. Typically, the employee is required to work set hours and days that are determined by the company. The relationship is intended to be permanent or semi-permanent, not temporary.
When you hire someone as an employee, their salary is not the only expense you will incur. An employer almost always covers the cost of an employee’s health insurance. An employer typically pays half of the employee’s Social Security and Medicare taxes, while deducting the other half from his or her paycheck. In many cases, the employer also contributes to an employee’s retirement funds by matching 401k allocations.
- Loyalty - Employees typically have stronger loyalty to your company than independent contractors, who most likely work for multiple employers. Employees who feel a sense of loyalty are apt to be more productive on the job.
- More control - It’s easier to guide and direct an employee. With an employee, you’re free to alter his or her role or add additional responsibilities. You can also set guidelines for when the employee reports to work and leaves.
- Better work flow - Businesses tend to operate more efficiently with employees than independent contractors. It’s much easier to coordinate a project or job when you can simply walk over to someone’s desk. There’s no guarantee that you’ll be able to immediately reach a freelancer or independent contractor when a job needs to be done.
- More overhead - Hiring an employee is more expensive than hiring an independent contractor. You have pay the employee’s health insurance and a portion of their taxes. You’ll also need to pay for all of their work supplies and work-related expenses.
- Greater management role - The more employees you have, the more time you’ll have to spend managing them. Less work is involved with independent contractors because they operate almost autonomously.
A 1099 contractor, also known as an independent contractor, is technically not an employee. He or she is paid a set amount for an agreed-upon task or project. Independent contractors do not receive benefits - they pay their own taxes and health insurance, and they do not receive paid holidays, vacation time or sick days. In exchange, they are free to work completely on their own schedule.
1099 refers the form independent contractors use to report their taxable earnings, just as W-2 refers to the form that reports an employee’s taxable earnings.
Before you hire someone as an independent contractor, it is extremely important to understand the legal differences between a contractor and an employee. Most states impose serious penalties on companies that misclassify employees as independent contractors just to save a few bucks.
Hiring an independent contractor costs much less than hiring an employee because there are no benefits to pay. You don’t have to cover the employee’s health insurance or a portion of their Social Security and Medicare taxes. You don’t have to offer paid vacations, holidays and sick days, or contribute to a 401k.
- Reduced overhead - Again, using independent contractors is much less expensive than hiring full-time employees.
- No health insurance costs - The high cost of health insurance is a major financial burden on many companies. When you use independent contractors, this is one cost you won’t have to worry about.
- Adjusting to varying workloads - When you use independent contractors, you can bring on additional help when you’re really busy, but you’re not stuck with those employees on the payroll when business slows down.
- Lack of control - You can’t tell an independent contractor when to report to work or how long they must stay. In fact, it’s against the law. You also can’t stop them from working with other companies and putting a higher priority on those projects. The only recourse if you’re unhappy with the performance is not to hire that person again.
- Misclassification penalties - Most states impose serious fines and penalties for companies that improperly classify their workers as independent contractors. If you’re treating an independent contractor like an employee by requiring them to arrive and leave at certain times, for example, you could get into serious trouble.
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