Should I Hire Employees or Independent Contractors?

Do you hire employees or independent contractors when you need help?

At one level, this is just a tax issue.

Employees are paid via W-2 (normal paychecks). The company pays half the employment taxes (Medicare and Social Security) and the employee pays half. The company will withhold whatever amount you ask of them for income taxes and send that off on your behalf to the taxing authority (IRS or your state). Your employer, generally, is responsible for covering the costs for you to do your job: they provide a computer, supplies, equipment, office space, etc. Generally speaking (this can get very nuanced and I’m not a lawyer) an employer is “on the hook” for whatever an employee does. If you hire a pizza deliver driver and they wreck the car, you are going to pay for it.

Contractors are effectively everything else. They can be considered a business to business relationship. As a company I might hire a contractor to do a specific job, pay them the project, hourly, weekly, or commission rate we agree upon in advance. The contractor is responsible for the costs and for their own liability. If they have more costs they cover it. If they break it, they cover it. They also are responsible for reporting their income and paying their own taxes. They are an independent business unit.

The biggest thing that most people misunderstand is that this is not a switch that can be flipped voluntarily. In most states the labor laws define who qualifies as a contractor versus an employee. It varies a LOT but generally if you:

  • Provide the tools or space
  • Tell the person when/where to perform the work
  • Tell the person how to perform the work

Then they are likely an employee, no matter what you want. By contrast if you:

  • Allow the person to exercise independent authority
  • Have no control over their time, schedule, tools, or costs
  • Hire people who do the same service for other companies or individuals

They are likely an independent contractor.

This is a summarized list of a very long bullet list. But hopefully this gets at least a basic explanation out there!