As a business owner, the key to success is having the right talent at the right time. But hiring full-time employees isn’t always the best solution, especially when you need specialized skills for specific projects. This is where an independent contractor comes in.
In this article, we will take a look at what is an independent contractor and explore the potential benefits and considerations while hiring one.
What is an Independent Contractor?
An independent contractor is a self-employed individual who provides services to businesses based on a contract. Unlike regular employees, independent contractors commonly operate as separate business entities and offer their specialized skills and expertise to multiple clients simultaneously.
An independent contractor is not considered a part of a company’s permanent workforce and is not subject to the same tax withholding, benefits, or employment regulations. Let’s illustrate that with an example:
Imagine your US-based company wants to rebrand itself and needs a new logo and branding materials. Rather than hiring a full-time graphics designer, you hire someone who specializes in rebranding just for this project. That person will be referred to as an independent contractor.
Your company will not be responsible for paying contractors social taxes or offering employment benefits. Rather, you will pay them a fixed amount for the entire project which can be divided based on milestones and they will be responsible for everything.
Why Do Companies Hire Independent Contractors?
Hiring independent contractors offers several benefits to businesses and entrepreneurs in terms of cost savings, liability, and access to expert talent. Let’s take a quick look at these advantages.
Increase in Profitability
A 2022 study that analyzed 413 projects of European high-tech companies found that the increased use of subcontracted workers (independent contractors) alongside permanent employees led to higher project profit margins, especially for larger teams.
The researchers suggest several factors that may contribute to these profitability gains including:
- Higher motivation levels compared to permanent staff who may be insulated from individual dismissal
- Ability to leverage specialized skills without long-term overhead
- Flexibility to increase contractor hours for intense phases and then decrease
Flexibility
Another reason why companies opt for independent contractors is the inherent flexibility. You can bring on an independent contractor for a specific task or a project and scale down your workforce without any long-term commitments.
Specialized Expertise
Independent contractors often possess highly specialized skills such as cybersecurity, front-end development, back-end development, UI/UX, visual content production, etc. That enables businesses to access top talent without extensive training.
For instance, if your company wants to assess vulnerabilities in its digital infrastructure, you can hire a cybersecurity expert specializing in risk assessment as an independent contractor instead of hiring a full-time security specialist.
Reduced Liability
In addition to flexibility and expertise, many companies hire independent contractors because they reduce a business’s liability and administrative responsibilities.
That is because contractors are responsible for aspects such as insurance, licenses, and compliance with applicable laws.
Independent Contractor Vs Employee
To better understand the distinctions between independent contractors and traditional employees, we spoke with Alfred Tolentino, an experienced hiring manager at RecruitGo.
According to Alfred, employees and independent contractors mainly differ on the following 4 points:
1. Tax Responsibilities
Independent contractors are responsible for paying their own self-employment and income taxes. The hiring company withholds no taxes. On the other hand, the employer withholds income taxes and payroll taxes from the employee’s paycheck.
2. Working Relationship
In addition to tax responsibilities, an independent contractor works on the basis of a contract where they are responsible for a specific task/project. These responsibilities end when the project is completed as per the contract. Moreover, contractors tend to work on multiple projects with different companies at the same time and are not bound to work solely for you.
In comparison, employees have an ongoing employer-employee relationship with the company and work primarily for one employer.
3. Employment Benefits
Another major difference between contractors and employees is that contractors secure and pay for their own benefits like health insurance and retirement plans. However, for employees, the employer provides benefits like health coverage, paid time off, retirement contributions, etc as a part of mandatory employment benefits.
4. Control Over Work
Last but not least, independent contractors have autonomy and control over how they perform work. That means they set their own schedules, choose strategies based on their experience, and use their preferred tools required to get the job done.
That is not the case with employees. For employees, their day-to-day tasks, processes, and work schedules are commonly dictated by the employer.
When to Hire an Independent Contractor VS Hiring an Employee
Now that we know the difference between contractors and employees, the question arises, when should we use a contractor and when is it better to hire an employee?
According to Alfred, the decision to engage an employee or independent contractor depends on your specific needs and circumstances.
If you need a dedicated resource for an ongoing long-term role where you have direct control over the tasks, hire an employee. However, If you have a specific short-term project where you need someone temporarily with the flexibility to scale up and down, and it does not require direct supervision, you can opt for an independent contractor.
Keep in mind that a contractor is not a replacement for your employees and is not ideal in every situation. It is more about using the right resources for the right job. In the section below, we will discuss some of the considerations that come with hiring an independent contractor.
Considerations for Hiring Independent Contractors
While independent contractors offer numerous benefits, there are several important considerations to keep in mind:
Misclassification Risk
One of the biggest pitfalls businesses must avoid when working with independent contractors is the risk of misclassification. Misclassification refers to situations where a company incorrectly treats a worker as an independent contractor when they should legally be classified as an employee.
Misclassification can have severe financial consequences such as paying taxes for the previous period, overtime wages, and benefits the worker should have received as an employee. Furthermore, authorities can levy additional penalties for the violation of labor laws depending on the country.
To mitigate this risk, companies can evaluate factors such as the working relationship, degree of control, and economic dependencies on the contractors. If any of that points towards an employer-employee relationship rather than a contractor, you might need to re-evaluate things.
A more viable solution is to hire your contractors as employees using an Employer of Record such as RecruitGo. An EOR becomes the legal employer and handles all administrative and legal aspects of the working relationship while the person works for you.
Intellectual Property Rights
IP conflicts are among the common areas of dispute between companies and independent contractors.
The ownership of intellectual property is clear when In the case of employees. However, when you are hiring independent contractors, you must clearly establish intellectual property rights and ownership through the contract.
For instance, if you hire a freelance graphic designer, you need to ensure the contract specifies that any new logos, designs, or creative works produced belong to your company, not the contractor.
If your contract does not explicitly state that, the contractor owns the rights to his work.
Quality Control
While independent contractors offer expertise, you’ll have less direct control over their day-to-day work processes compared to traditional employees. To ensure quality, you need to have a thorough quality assurance and communication system in place.
Hire Independent Contractors Compliantly with RecruitGo
Independent contractors offer a flexible, cost-effective way to access top-tier skills without long-term commitments. However, engaging contractors also comes with compliance risks you can’t ignore. That’s why it is advisable to partner with experts who understand the regulations and handle the process for you.
RecruitGo helps employers hire remote contractors and employees internationally. Our integrated solution allows you to efficiently hire, manage, and pay your remote talent from a single platform while staying in compliance with local laws.
For more information, fill out the form below and we will put you in touch with one of our hiring experts.
