Should You Hire a Contractor or an Employee? [VIDEO]

by Laura Messerschmitt on December 9, 2010
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Have you ever wondered whether you should hire an employee as a full-timer or as a contractor?  In this next installment of our payroll video series, sponsored by Intuit Online Payroll, Rhonda Abrams tells you what you should be thinking about as you make this decision.

Transcript

Rhonda Abrams: Let’s say your business is growing and you need help. You’re ready to hire. When I hired my first employee, like most small businesses, it wasn’t an employee at all. It was an independent contractor.

But what’s the difference and does it really matter? Well, in the eyes of the law, it matters and there is a difference. So you need to acquaint yourself with at least the basics of an employee’s legal status.

Why do most small businesses start by using independent contractors? Lots of reasons. The biggest? You don’t have to pay payroll taxes, but you also have a lot more flexibility. You use them when you need them, but when you don’t, you’re not continuing to pay salary.

Another reason is that you can find independent contractors that have special skills that you may not be able to afford in a full-time employee, like a web designer, or a lawyer, or a marketing specialist. Then, it makes sense.

But just because you want to have someone as an independent contractor, doesn’t mean it’s always the best idea. Or a legal idea.

Remember, an employee works for you, on your terms. They show up at the office, restaurant or plant, at the times you tell them to and work the hours you tell them to. There’s a lot more control.

They’re also likely to be more loyal and see their future with you in a way that an independent contractor won’t.

But on top of all that, you don’t necessarily get the choice. The IRS is very finicky about the determination between the classification of an employee versus independent contractor. The IRS and state labor agencies aggressively pursue companies that intentionally or unintentionally classify employees as independent contractors. And the penalties are steep: back taxes, as well as fines and penalties. Even large companies have been caught doing this.

So it’s important to know the difference between independent contractors and employees. In the long run, you’ll use both. I do.

If you’re ready to hire, you can get a free copy of my new book, “Hire Your First Employee”, compliments of Intuit. Just go to FirstEmployee.Intuit.com.

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