Contractors vs. Employees (Differences) – Who Should You Hire? – Latest News

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When a small-business owner decides they need more help, the next question is whether they should hire employees or freelancers. The decision can be difficult — especially if you’re working with a limited budget.

To help with your decision, we’ve outlined the legal differences between freelancers and employees, and some tips for deciding which type of help you need.

Freelancer vs. Employee: What’s the Difference?

There are significant legal differences between hiring an employee and bringing on a freelancer or independent contractor.

Employee Contractor
Taxes Employers are responsible for withholding income tax, Social Security, and Medicare from an employee’s wages. Freelancers are responsible for paying their own income and self-employment taxes.
Employment Laws Employees are covered by several federal and state employment laws, including minimum wage and overtime regulations. Although it isn’t true in all states, freelancers are typically not covered by most employment and labor laws.
Benefits Employers may be required to provide vacation, holiday, and sick pay to full-time employees. Employers are not responsible for providing paid vacation, holidays, or sick pay to freelancers and independent contractors.
Insurance Employers may be required to purchase workers’ compensation insurance and pay unemployment insurance taxes. Employers are not required to purchase workers’ compensation or pay unemployment taxes on freelancers.

Can I Classify My Employees as Independent Contractors?

Many small-business owners review the table above and assume hiring a freelancer is the way to go. After all, when you hire an independent contractor, you aren’t responsible for things like tax withholding, benefits, and insurance as you are when you hire an employee. However, the IRS has rules about whom you can treat as an independent contractor. You can face some pretty stiff penalties if you misclassify employees solely to avoid taxes.

According to the IRS, there are three factors involved in whether a business should classify a new hire as an employee or a freelancer.

  1. Behavioral Control. An employer has the right to direct and control work performed by an employee, such as dictating when or where an employee must work, or what tools or services they must use. However, a business owner cannot determine how an independent contractor works, only the desired results of the work.
  2. Financial Control. An employer has a right to direct and control the financial and business aspects of an employee’s job. For example, an employer can mandate an employee cannot have a second job or start a side business that competes with the employer’s business. Freelancers and independent contractors are generally free to work for other clients and seek out other business opportunities.
  3. Relationship. An employer-employee relationship typically continues indefinitely, while the relationship between a business and a contractor usually exists for a specific project or period. It’s good to have a written contract between the company and the contractor that states the worker is an independent contractor. But it’s not sufficient on its own to determine the worker’s status.

Should I Hire a Freelancer or an Employee?

Aside from the IRS rules, think about your business needs when deciding whether to hire an employee or freelancer. The questions below will help you work through the decision-making process.

1. Do You Need Long-Term Support or Help on a Short-Term Basis?

If the work to be done is just a short-term project, you may want to hire an independent contractor. For example, if you need help building a website, but you won’t have much work for a web developer once your site is up and running, that’s a good project for a contractor that you find from a platform like Fiverr.

On the other hand, if you need ongoing help ful

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