Many modern businesses nowadays choose to delegate or outsource tasks to independent contractors. The main reason is that they either don’t have enough funds to hire full-time employees or they feel more comfortable leaving some tasks to professionals. But, what exactly is an independent contractor? Basically, independent contractors are individuals or companies that offer services to other companies. In addition, companies procure services from independent contractors, but contractors are not employees of the company that hired them.
That means that businesses only need to pay contractors for the duration of the job. What’s more, you can easily terminate the relationship after the work is completed, with no strings attached. There are many benefits to hiring independent contractors, but there are also risks involved that you must be aware of. Here are a few risks and benefits of hiring an independent contractor (IC).
Saves you money
As mentioned before, many businesses hire ICs because they don’t have enough resources to hire more full-time employees. On the other hand, some businesses prefer IC’s over hiring full-time employees and establishing new departments within their organization. After all, contractors are either paid by projects or by the hour. On the other hand, the costs of hiring new employees consist of office space and supplies, compensation for employees and insurance, social security and health insurance, among other things.
In fact, health insurance and social security take 7.56% of an employee’s salary, while other costs, such as paid leave, insurances and compensations included in employee benefits can take up 20-30% of payroll costs. Simply put, IC services may initially cost more, but there are no additional benefits you’d be obliged to pay. That means that the cost of hiring and training new employees can greatly outweigh the costs of hiring an independent contractor.
By hiring an IC, you’ll have access to various skill sets you don’t have in your company. For instance, procuring services from an IT contractor means you’ll have an outsourced IT department taking care of your hardware and software. It also means you won’t have to hire and train full-time IT staff. The same goes for other skills you might need to develop and grow your business.
Furthermore, once you no longer require the skills of your IC, you can simply terminate the relationship with a letter of resignation, with listed reasons as to why you don’t need their services anymore. Just make sure you’re not violating any terms from a contact you’ve established once you’ve hired an IC. That way, you won’t burn any bridges and you can even hire them again if a need arises. What’s more, you won’t face any legal issues or claims made against you for a contractor layoff, because contractors are not employees and are, therefore, not protected by employee rights.
Risk of government audits
Hiring ICs means you don’t have to pay for social security, health insurance and other taxes. ICs are business owners and they report their own incomes, taxes, payrolls and deductibles, so that’s not your concern. However, that doesn’t mean that government won’t try to audit your business. The main reason is that governments try to enforce as many people to be classified as employees not as ICs. After all, agencies, such as IRS (Internal Revenue Service) collect money from taxes and insurances.
That’s why it’s important to fill out the right forms and classify that you’ve hired an IC and not an employee, otherwise you can get audited by several federal agencies. For instance, aside from IRS, you may get audited by Occupational Safety and Health Administration for safety laws regarding the workplace or by the Department of Labor for minimum wage laws.
Less control over the workflow
Independent contractors, as their name suggests, have their unique way of doing things and are not obliged to follow any rules you have established within your organization. That means that you have little to no control over how they do things or how the project develops. If you try to ascertain more control over ICs, you’re risking classifying them as employees, which means you’ll have to pay for their benefits.
Moreover, ICs are usually hired for short-term jobs or projects, which means you won’t really have the time to establish any long-lasting relationships or encourage loyalty. Therefore, you shouldn’t be surprised if an IC abandons your project for better paid work. In addition, if you fail to do paperwork accordingly, you may not own the copyright for the work that’s been completed.
Hiring independent contractors is a great opportunity for many businesses to scale properly, especially since they have access to skills sets they don’t have within their company. However, as beneficial as hiring an IC can be, business owners must also be aware of the risks involved, in order to prepare adequately and protect their business.