How we do work today is changing with the rise of the gig economy. More people currently take on “gigs” or projects for various employers. As a result, more and more businesses are looking into hiring independent contractors or contract employees to meet their needs. Contract labor is becoming a valuable tool for many businesses.
Contract labor is a solution for businesses to help them manage human resources while they don’t have an HR department yet. With contract labor, they can reduce operational costs while simplifying their legal responsibilities. That’s why it’s no surprise that contract labor made up 10.1 % of total employment in May 2017.
Right now, the gig economy is already in full swing in the US. More and more Americans are improving their skills to make a living doing what they love. It goes to say that workers and businesses are recognizing the benefits of a contracted employee.
What Is Contract Labor?
Before you go ahead and hire a contract employee, let’s talk about what it is first. An excellent example of contract labor is a marketing agency that takes on different clients and projects. Some of these projects may need specific skills like programming or expertise in particular software programs.
The company may not want to hire a full-time employee since they only need their expertise for this one project. So instead, they hire a contract employee for that specific project that lasts a certain period of time. The independent contractor then works for the company under an individual contract. When the contract period elapses, the working relationship terminates.
Hiring an independent contractor is different from when you hire a salaried employee. There are legal requirements and employee benefits that must be provided to full-time employees. Often, contract labor works very differently and does not require the same legal stipulations or the provision of employee benefits.
What is a Contract Employee?
First things first, freelancers and contractors are slightly different, although these terms are usually used interchangeably. An independent contractor usually works for only one client at a time, which may involve full-time hours. On the other hand, freelancers usually work part-time for several clients at the same time.
In many cases, a person can be a contractor at times. And the same worker may be a freelancer at other times. It often depends on the individual’s preferences and circumstances. Most independent contractors need a contractual agreement before they can start working. The terms of the contract can differ based on the specifics of their industry.
However, most contracts involve the following provisions:
- Maximum hours of work per week or month
- List of conflict of interests
- Copyright or intellectual right agreement
- Breach of contract clause
- Injury liability clause
- Termination scenarios clause
The company hiring an employee generally uses an attorney to write the contract. Often, a unique contract is prepared for each contractor. There is no one-size-fits-all contract, so a person hired to design a website will have a different arrangement than someone recruited to clean the company headquarters after hours.
Although the idea of hiring a contractor may seem simple, you must remember there are laws related to it that can get you in trouble if you aren’t careful. For this reason, it is crucial that you and your staff know their obligations.
Each worker must be traceable through tax records, or the IRS may come knocking on your door. Ensure that your other employees don’t get into your mix of independent contractors by ensuring every member of your team knows your worker classification system.
Contracted vs. Salaried Employee: What’s the Difference?
There are a few things that make contract labor different from a salaried employee. It’s essential to know these important differences before you decide on which one to hire for your project.
Independent contractors, freelancers, sole proprietors, or self-employed individuals are also known as 1099 employees. They are not exactly employees but business owners providing different services to companies or individuals.
Independent contractors are different from W2 employees, which are wage-earning or salaried employees. They are not their own business owners, which means they are included on another company’s payroll, tax, and other relevant areas.
The names 1099 and W2 employees are derived from the respective forms used when paying taxes owed to the IRS. The way they pay taxes is one of the main differences between independent workers and salaried employees.
Tax Requirements
Compared to salaried employees, contractors handle their own taxes. This means less cost and work for the employer since they don’t need to pay social security tax, employment tax, or unemployment tax. The employer only needs to pay the contractor the flat amount they charge for their service.
The first time the employer hires a contractor, they send them a W-9 form before the start of a tax year. The contractor fills out the form with their tax details, which the employer uses to fill out the 1099-NEC federal tax form. It’s where the employer indicates the amount they paid the contractor during that year.
For contract employees outside the US, the employer needs to send a W-8 form instead of W-9. Then, contractors will use it to report their taxes. But either way, the contractor does their own taxes, unlike with W2 or salaried employees.
Employer Costs
Another difference between 1099 and W2 employees involves the costs incurred by an employer. Employers don’t have to worry about minimum wage or pay benefits to a contractor, unlike a salaried employee. This can extend to not providing them with an office, travel allowance, company car, and meal tickets, among other perks and benefits.
One of the biggest differences between salaried and contracted employees is that the employer doesn’t have much control over the latter’s work hours, work location, or how they do their work. The contracted employee sets their own hours and availability.
Because they control their work hours, contractors may not be able to perform urgent tasks. It also means the employer likely will have to pay the contractor more to complete a project in a shorter time. Providing them with training is also not required, unlike with W2 employees.
It is not always suitable to hire an independent contractor. It is better to hire a salaried employee in some cases, such as when you need more control in your work relationship. For instance, you may want a W2 employee whom you can tell when and where to work during the busy holiday season.
The Result of Misclassifying an Employee
Misclassifying your salaried employee as a contractor is a big mistake that can cost you a lot in the end. You could face hefty fines if you misclassify your worker because of the tax considerations. If you end up doing this, you may have to pay back taxes and pay compensation liabilities. You will also have to pay all the benefits that your misclassified worker should have had while under your employment.
If you want to prevent this from happening, make sure that you know the rules of employee classification specified by the IRS. You have several factors to consider when you classify your workers, such as whether they received training, whether they work in your office, and whether they can work for other companies. It is best to seek legal advice when hiring a freelancer or a contractor to avoid getting on the bad side of the IRS.
Benefits of Hiring an Independent Contractor
Hiring an independent contractor can be intimidating, but it provides flexibility, saves you time and money, and lets you connect with top talent. It offers excellent benefits if you are a fast-growing small business, allowing you to focus on more critical aspects of growing your company.
Hiring an independent contractor provides many valuable benefits over hiring a traditional employee.
Hire the Best Person for the Job/Project
It is common when working in a small business or startup to do work that isn’t one’s area of expertise. Often, it ends up this way due to budget constraints.
Contractors can help with this. An employer can hire a highly skilled worker for a specific role just for several hours a week. And because you are hiring a contractor, you have the advantage of hiring from a wide range of talent.
Gives You More Flexibility
Businesses all have highs and lows. There are months where you are busy with too much work. Then the next month, almost nothing is happening. So often, either your workers are swamped with work or are bored with nothing to do.
You usually need extra help during busy times, but they will be additional costs during your slow times. This is when contractors can help. With contract labor, you can scale your workforce based on your workload as it allows you to hire contract employees during your busy periods.
This way, you can also go the contract-to-hire route. You can recruit your contractors into becoming full-time employees later on if your budget permits or your company needs them. The advantage is your freelancers are now more skilled and more familiar with your business.
Saves You Time and Money
It is generally more affordable to hire a contractor than a salaried employee since you don’t have to pay benefits, provide them with tools and equipment, or pay taxes and social security. All you need to do is pay them the lump sum you owe for their services.
Besides saving you money, contractors save you time as well since they need less administrative support. The hiring process with contractors usually takes less time as well compared to recruiting a salaried employee. If you already have contacts, you can essentially hire an independent contractor within only a matter of days.
Reduced Legal Responsibilities
The consensus about hiring independent contractors is you have less legal risk than salaried employees. After all, contractors cannot file for wrongful termination in case you fire them. They are also not eligible for workers’ compensation. As a result, you won’t be wasting time, money, and resources to pay for legal help.
Need Contractors for Your Business? Hire Bunny Studio Freelancers Today
Now you see the advantages of hiring an independent contractor or a freelancer. Admittedly, they are not ideal in all circumstances. But if yours is a small business that needs help occasionally, hiring a contractor for a specific gig can be a big help. Contact us today to find the right contractor for your next project.
