Who is More Cost Effective? The Contractor or Employee?

Author: Evelyn Keaton

Hiring on a shoestring budget means you have to make smart decisions about who you hire, how much you pay them and what type of worker they are. Contractor and employees have different costs associated with them, and it's important to know the difference before you make a decision.

Financial benefits of hiring a contractor

Contractors typically must supply their own equipment, which means you don't have to invest as much in computers, phones and other office supplies. Because they are not employees, your worker's compensation does not increase when you hire a contractor. Contractors are also responsible for their own income taxes and benefits, saving you on payroll taxes, unemployment insurance, medical benefits and retirement programs. You also have more flexibility to hire and fire a contractor; if the work runs out, it's much easier for you to complete the contract and end your financial obligation.

Financial benefits of hiring an employee

Because contractors supply their own equipment, provide their own benefits and pay a higher self-employment tax rate, their pay rates tend to be higher. You can often hire an employee at a lower hourly wage or annual salary, but you have to factor in all the other associated costs to make a fair comparison. You also have more control when you hire an employee because you can more directly supervise them and influence how they spend their working time.

If you're hiring on a shoestring budget and you decide that a contractor is the most cost-effective way to supplement your staff, make sure you follow all state and federal employment regulations. If you mistakenly classify a contractor, you could be subject to tax penalties later if it's determined that they were actually an employee. If this happens, you'll be liable for unpaid taxes and fines.

If you're hiring on a shoestring budget and need advice from an expert, contact The Tax Office, Inc. We can help you evaluate the costs of hiring an employee versus a contractor so you can make a smart financial decision for your business. Contact us today to schedule a consultation.