Hiring Contracted Workers vs Full-time Employees
As employers, hiring can be quite difficult especially with how the nature of work has changed with more employees gravitating toward hybrid, remote or even project-based work. How then, as an employer, do you make the right choice on who to employ?
It depends largely on the role and function of the employee. The main difference between contract employees and full-time workers revolves around differences in the employer-employee relationship and tax liabilities.
A contracted worker generally has more independence over their work and is responsible for their own taxes. A full-time employee works under the direction and supervision of an employer who reports their taxes.
In most scenarios, contracted employees tend to cost less for a business (no need for benefits such as health insurance or pay payroll taxes for them), there have been cases where businesses have misclassified full-time employees as contracted employees, resulting in significant tax penalties and fees.
A contract worker, also known as an independent contractor is an individual who enters into a contractual agreement with a business in order to provide a service in exchange for a fee.
To be considered a contracted employee, a worker must generally meet the following requirements:
- Paying their own taxes on the payment they receive from the business
- Use their own equipment and supplies in order to complete their contracted work
- Provide an invoice upon the completion of their work, as per their contractual agreement
- Contracted workers are not technically “employees” since they provide services on a short-term or individual project basis.
- Contract workers do not have to be offered employment benefits by the businesses that hire them.
- Even if the company offers group health insurance to full-time employees, they do not need to extend these benefits to contract employees.
Full-time employees are supervised by their employer, who direct and controls their work throughout a long-term relationship.
The employer must pay payroll taxes for each of their full-time employees, as well as provide them with certain legally required benefits.
According to the IRS, there are three factors for businesses to consider when classifying workers as either full-time employees or contracted workers:
Work-Does the employer have the right to control what the worker does and how the worker completes his or her job (i.e. the scheduling or process of the work)?
Finances – Does the employer control how the worker is paid? Does the employer provide supplies, reimburse expenses, or pay payroll, Social Security, and Medicare taxes?
Employer relationship – Does the employer offer employee-type benefits? Is the relationship between the employer and worker ongoing or a key part of the business?
If most of these factors apply to the workers hired by a small business, then they would probably be considered full-time employees by the IRS.
For a small business, there are advantages to working with both contracted workers and full-time employees. Here are several factors to consider when comparing these two types of workers.
Contract | Full-Time | |
Cost | Contract workers may charge higher flat fees or hourly rates | Paying for benefits like medical, dental, Social Security, taxes, vacation time |
Project Scope | Contract workers may be a better choice for short-term projects which require outside expertise, such as technical consultations, seasonal assistance, or administrative services. | ongoing work that requires supervision, involves building relationships, or plays an important role for the business |
Loyalty | Due to the short-term nature of contract projects, a contracted worker might stop working with a business if another company offers to pay them more, or be less accessible if they have multiple clients. | Full-time employees may be more likely to remain loyal and committed to their employer in the long-term, especially if they are offered desirable benefits. |
This is highly dependent on your project and requirements. The best choice could be one of them or even a combination of both. In the end, you must choose one that lets you succeed in the current market while at the same time ensuring certainty for years to come. Consider the following factors when choosing which is right for you:
Legal liabilities of misclassification
The cost-benefit of short-term responsibility vs. long-term relationships
The current and long-term needs of your business
Full-time employees and contract workers both can be extremely beneficial for specific tasks. As a business owner, you should examine these differences, consider your projects’ requirements, and then choose the right type of worker.
If you have an incorporated business, such as a BV or NV, then you need to calculate and pay corporation tax (vennootschapsbelasting). Foundations and associations also sometimes need to do a corporate tax declaration.
Global People is a leading local employment solutions provider for national and international corporations and can advise and escort you in your next destination.
