Starting your own business can be an exciting and often overwhelming process. There are so many decisions to be made when undergoing business formation. One aspect that many new business owners often struggle with is whether to use independent contractors, employees or a mix of both.
Both independent contractors and employees have special considerations as they function differently. Being educated on the differences can help business owners to make an informed decision about what is best for their business model.
Key differences between independent contractors and employees
Each type of work comes with distinct differences that business owners may want to consider. Let’s take a brief look at each:
- Level of independence: Employees usually work for one company while contractors often provide consulting services for multiple companies.
- Workplace environment: Employees usually work at the employer’s business while contractors often work from home or another office.
- Benefits: Employees often have benefits like insurance while contractors are usually required to have their own benefits.
- Levels of supervision: Employees usually work under someone’s direct supervision and contractors most often work independently.
- Tax obligations: Employees commonly have state and federal taxes withheld as well as Social Security, Medicare and the Federal Insurance Contributions Act (FICA). Contractors are usually responsible for paying their self-employment taxes.
- Wages and overtime: Employees are covered under state and federal wage and hourly laws regarding minimum wage and paid overtime. Contractors are paid according to the terms of their contracts and usually do not receive overtime.
When forming a business, it is important to be aware of the differences in worker classifications to ensure that your business is benefitted by having the right mix of employees and contractors. You also want to avoid running afoul of labor laws, workers’ compensation regulations and tax laws by accidentally misclassifying an employee as a contractor.
There are a lot of different legal issues that small business owners face every day. Having experienced assistance as your business develops can prevent a lot of future problems.
