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Employees vs. Contractors: What’s the Difference?

employees vs contractorsIt’s a dilemma, isn’t it? You need help in your business – after all, you can’t possibly do everything yourself – but the added expense and headache of hiring someone just doesn’t seem worth it. And then there is the question of hiring an actual employee, or simply working with a self-employed contractor. Which you choose will depend largely on your business model, but there are some major differences you need to be aware of when making a decision on employees vs. contractors.

The Tax Burden Shifts

Probably the most important difference between an employee and a contractor lies in who has the responsibility for paying taxes. Employers withhold taxes from their employees’ pay and send regular payments to the government. These withholdings are then reported to the employee at the end of every year (and also on their check stubs) on IRS form W-2, which the employee uses when he or she files his or her income tax return.

Contractors, on the other hand, are responsible for their own tax bill. That means that when you pay them, you don’t withhold any money to send to the government on their behalf. You also don’t issue a W-2 at the end of the year. Instead, contractors – if they’ve earned more than $600 dollars and are not a corporation – receive a 1099-MISC.

The Pay is Different – Maybe

Contractors – depending on where they live and work – typically make more per hour than an employee does. At first glance, it can seem like it would be smarter (or at least less expensive) to hire an employee than a contractor, but if you look carefully, you might be surprised.

First, while you might pay a US-based virtual assistant $25 or more per hour, you have to keep in mind what you are NOT paying for. You don’t have to foot the bill for:

• Office space and furniture – your VA works from his or her home.
• Computer equipment – your VA buys her own.
• Software – again, your VA supplies her own tools, with very few exceptions.
• Vacation and sick days – contractors are only paid for the hours they actually work.
• Lunch breaks (and all that other unauthorized downtime) – most contractors work with a timer system so you pay only for the hours actually worked.
• The employer portion of Social Security tax – as a self-employed individual, contractors are responsible for the entire amount.

So while it might seem like hiring $10 per hour employee is the better deal, by the time you’re done paying for all those extras, you can bet you’re paying close to what you’d pay a contractor. Plus, you don’t have to deal with payroll – simply cut a check and issue a 1099-MISC at the end of the year.

You Are Not Her Only “Employer”

When you hire an employee, you can expect that he or she will show up at the designated time and focus only on you and your business for the time he or she is working.

Not so with a contractor. Her time will likely be divided between many clients, so organizing your tasks is critical if you hope to get the most out of the relationship. She most likely schedules her client work on a first-come-first-served basis, so unlike an employee, you cannot add a rush job to her task list with a moment’s notice.

Whether you hire a true employee or just retain the services of a contractor will depend largely on the type of business you own and how much work there is for him or her to do. For small local businesses like retail stores and restaurants, employees are obviously necessary. But if your business exists online, you might just be better served by opting for contractors instead.

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