{"id":1678,"date":"2019-10-11T21:45:54","date_gmt":"2019-10-11T21:45:54","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/?post_type=chapter&#038;p=1678"},"modified":"2026-03-06T16:33:46","modified_gmt":"2026-03-06T16:33:46","slug":"employees-vs-contractors","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/chapter\/employees-vs-contractors\/","title":{"raw":"Employees vs Contractors","rendered":"Employees vs Contractors"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Evaluate the use of resources: employee vs. independent contractor<\/li>\r\n<\/ul>\r\n<\/div>\r\nTo employ or not to employ? That is the question of the small business owner much of the time. The answer lies in the answer to a couple of other questions\u2014mainly how much responsibility does the owner want to have for that employee, and how much control does the owner want to have over the final product or service?\r\n\r\nIndependent contractor growth is outpacing small business hiring, which means that more small businesses are opting to contract over bringing on a new employee.[footnote]Paychex, Inc. \u201c<a href=\"https:\/\/www.prnewswire.com\/news-releases\/new-paychex-data-shows-independent-contractor-growth-outpaces-employee-hiring-in-small-businesses-300775712.html\" target=\"_blank\" rel=\"noopener\">New Paychex Data Shows Independent Contractor Growth Outpaces Employee Hiring in Small Businesses<\/a>.\u201d PR Newswire, January 9, 2019.[\/footnote] And even though an independent contractor works from her own office, bringing her own equipment to the job and paying her own benefits, she\u2019s not always the best choice for a small business.\r\n\r\nLet\u2019s start by understanding the difference between an employee and an independent contractor.\r\n<h2>Employees<\/h2>\r\n<h2><img class=\"alignright wp-image-2492\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/10\/15185541\/multi-tasking-2840792_1920-300x228.jpg\" alt=\"Decorative image.\" width=\"400\" height=\"304\" \/><\/h2>\r\nAn employee is someone whose quality and manner of work the employer has a right to control. They are, legally speaking, in a master\/servant relationship, and often referred to as W-2 employees, a reference to the federal income tax form they are served at year end with their total wages for the year.\r\n\r\nAs an employer, the small business owner controls the behavior of the employee, including a method for doing the work, a schedule on which that work will be done, and so on. The small business owner, as employer, handles the pay rate and pay schedule of this individual, as well as associated payroll taxes and benefits costs. Often, this employee will develop relationships with other co-workers at the owner\u2019s place of business.\r\n\r\nThe cost of an employee goes beyond a normal salary or hourly rate. A payroll function goes along with that first employee, one that takes time and costs money. Checks must be written on a regular basis. Taxes, social security, and Medicare must be withheld, and payroll taxes paid. Other costs incurred with an employee would include the cost of a place to work, and the supplies with which to do that work, which can include a computer, office supplies, and more. Creating a positive, motivating work culture for that employee is also important, and that comes at a cost.\r\n<h2>Independent Contractors<\/h2>\r\nAn independent contractor, on the other hand, is someone the small business owner engages to perform a certain task, but whose manner of work the owner does not have a right to control. This person is sometimes legally referred to as a 1099 employee, in reference to the tax form he or she receives at year-end outlining how much the business has paid to the contractor that year.\r\n\r\nThe contractor works either short term, or on a project-by-project basis. He or she pays all taxes on earnings, including any federal, state, local taxes, or social security. Sometimes, the quality of the contractor\u2019s work is governed by professional standards or codes, like that of an electrician or plumber. These are standards and codes the small business owner doesn\u2019t have to know or understand, and for that reason contractors can be attractive.\r\n\r\nAnother reason why contractors can be attractive to small business owners is because they get the work done without all the extra paperwork that comes along with having one\u2019s own employees. But there is danger in treating a contractor like an employee. While the IRS does not provide a single rigid definition of contractor versus employee, it evaluates worker classification using several factors related to behavioral control, financial control, and the overall relationship between the worker and the business.[footnote]Internal Revenue Service. \u201cIndependent Contractor (Self-Employed) or Employee?\u201d IRS. Accessed March 6, 2026. https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/independent-contractor-defined.[\/footnote]\u00a0There are some hefty penalties in store for those business owners that don\u2019t stay within those guidelines.\r\n\r\nSo what\u2019s the cost of a contractor? Basically, costs with a contractor are negotiated up front, before the work begins, and the final fee is paid when the work is complete. Because contractors are responsible for all their own taxes, social security and Medicaid payments, their fees are usually higher to cover such costs. An employer\u2019s only obligation to the contractor is to pay their invoices in a timely manner and issue a 1099 at the end of the year for their tax purposes.\r\n\r\nThe downside is that a contractor isn\u2019t as loyal to the small business as an employee would be, and he or she is legally limited to only 1,040 hours of work (which is six months at 40 hours a week). And, because that contractor is self-employed, his or her timing might not match that of the owner, and the owner doesn\u2019t really have any control over the quality of work or the time it takes to complete. While you can create contracts that stipulate acceptance criteria, there's additional cost of time or money to get work redone. These are all hidden costs to a small business owner.\r\n<div class=\"textbox tryit\">\r\n<h3>PRactice Question<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/7c936b58-9e5d-487e-b99e-2f3283a4263b\r\n\r\n<\/div>\r\n<h2>Employee or Contractor?<\/h2>\r\n<h2><img class=\"alignright wp-image-2494\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/10\/15185957\/female-865110_1920-300x200.jpg\" alt=\"Decorative image.\" width=\"400\" height=\"267\" \/><\/h2>\r\nAs an HR professional, it can be difficult to determine which way to go with this position that needs to be filled. Will the contractor be less expensive and more efficient, or is it time to bring a new employee on board?\r\n\r\nA contractor is the best choice when\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">The work requires a level of expertise no employee in the business has, and it would cost too much time and money to train someone to do it (e.g., IT specialty, an electrician, a physician)<\/li>\r\n \t<li style=\"font-weight: 400;\">The work is seasonal, and extra hands are needed to fulfill orders<\/li>\r\n \t<li style=\"font-weight: 400;\">The work is administrative, like bookkeeping or other tasks that can be done remotely and typically don\u2019t require a full-time employee<\/li>\r\n<\/ul>\r\nAn employee works best when\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">The work requires close supervision in order to be completed<\/li>\r\n \t<li style=\"font-weight: 400;\">The work requires regular local knowledge and an employee can bring specialized local knowledge to the table<\/li>\r\n \t<li style=\"font-weight: 400;\">The work requires extensive knowledge of what\u2019s going on within the walls of the small business<\/li>\r\n<\/ul>\r\nHR professionals can help small business owners determine the cost and relationship benefits of a contractor versus an employee and can assist in avoiding any misclassification of either.\r\n<h2>Sources<\/h2>\r\n<p class=\"hanging-indent\">Fleischer, Charles H.\u00a0<i>HR for Small Business: An Essential Guide for Managers, Human Resources Professionals, and Small Business Owners<\/i>. Naperville, IL: Sphinx Pub., 2009.<\/p>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Evaluate the use of resources: employee vs. independent contractor<\/li>\n<\/ul>\n<\/div>\n<p>To employ or not to employ? That is the question of the small business owner much of the time. The answer lies in the answer to a couple of other questions\u2014mainly how much responsibility does the owner want to have for that employee, and how much control does the owner want to have over the final product or service?<\/p>\n<p>Independent contractor growth is outpacing small business hiring, which means that more small businesses are opting to contract over bringing on a new employee.<a class=\"footnote\" title=\"Paychex, Inc. \u201cNew Paychex Data Shows Independent Contractor Growth Outpaces Employee Hiring in Small Businesses.\u201d PR Newswire, January 9, 2019.\" id=\"return-footnote-1678-1\" href=\"#footnote-1678-1\" aria-label=\"Footnote 1\"><sup class=\"footnote\">[1]<\/sup><\/a> And even though an independent contractor works from her own office, bringing her own equipment to the job and paying her own benefits, she\u2019s not always the best choice for a small business.<\/p>\n<p>Let\u2019s start by understanding the difference between an employee and an independent contractor.<\/p>\n<h2>Employees<\/h2>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-2492\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/10\/15185541\/multi-tasking-2840792_1920-300x228.jpg\" alt=\"Decorative image.\" width=\"400\" height=\"304\" \/><\/h2>\n<p>An employee is someone whose quality and manner of work the employer has a right to control. They are, legally speaking, in a master\/servant relationship, and often referred to as W-2 employees, a reference to the federal income tax form they are served at year end with their total wages for the year.<\/p>\n<p>As an employer, the small business owner controls the behavior of the employee, including a method for doing the work, a schedule on which that work will be done, and so on. The small business owner, as employer, handles the pay rate and pay schedule of this individual, as well as associated payroll taxes and benefits costs. Often, this employee will develop relationships with other co-workers at the owner\u2019s place of business.<\/p>\n<p>The cost of an employee goes beyond a normal salary or hourly rate. A payroll function goes along with that first employee, one that takes time and costs money. Checks must be written on a regular basis. Taxes, social security, and Medicare must be withheld, and payroll taxes paid. Other costs incurred with an employee would include the cost of a place to work, and the supplies with which to do that work, which can include a computer, office supplies, and more. Creating a positive, motivating work culture for that employee is also important, and that comes at a cost.<\/p>\n<h2>Independent Contractors<\/h2>\n<p>An independent contractor, on the other hand, is someone the small business owner engages to perform a certain task, but whose manner of work the owner does not have a right to control. This person is sometimes legally referred to as a 1099 employee, in reference to the tax form he or she receives at year-end outlining how much the business has paid to the contractor that year.<\/p>\n<p>The contractor works either short term, or on a project-by-project basis. He or she pays all taxes on earnings, including any federal, state, local taxes, or social security. Sometimes, the quality of the contractor\u2019s work is governed by professional standards or codes, like that of an electrician or plumber. These are standards and codes the small business owner doesn\u2019t have to know or understand, and for that reason contractors can be attractive.<\/p>\n<p>Another reason why contractors can be attractive to small business owners is because they get the work done without all the extra paperwork that comes along with having one\u2019s own employees. But there is danger in treating a contractor like an employee. While the IRS does not provide a single rigid definition of contractor versus employee, it evaluates worker classification using several factors related to behavioral control, financial control, and the overall relationship between the worker and the business.<a class=\"footnote\" title=\"Internal Revenue Service. \u201cIndependent Contractor (Self-Employed) or Employee?\u201d IRS. Accessed March 6, 2026. https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/independent-contractor-defined.\" id=\"return-footnote-1678-2\" href=\"#footnote-1678-2\" aria-label=\"Footnote 2\"><sup class=\"footnote\">[2]<\/sup><\/a>\u00a0There are some hefty penalties in store for those business owners that don\u2019t stay within those guidelines.<\/p>\n<p>So what\u2019s the cost of a contractor? Basically, costs with a contractor are negotiated up front, before the work begins, and the final fee is paid when the work is complete. Because contractors are responsible for all their own taxes, social security and Medicaid payments, their fees are usually higher to cover such costs. An employer\u2019s only obligation to the contractor is to pay their invoices in a timely manner and issue a 1099 at the end of the year for their tax purposes.<\/p>\n<p>The downside is that a contractor isn\u2019t as loyal to the small business as an employee would be, and he or she is legally limited to only 1,040 hours of work (which is six months at 40 hours a week). And, because that contractor is self-employed, his or her timing might not match that of the owner, and the owner doesn\u2019t really have any control over the quality of work or the time it takes to complete. While you can create contracts that stipulate acceptance criteria, there&#8217;s additional cost of time or money to get work redone. These are all hidden costs to a small business owner.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRactice Question<\/h3>\n<p>\t<iframe id=\"assessment_practice_7c936b58-9e5d-487e-b99e-2f3283a4263b\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/7c936b58-9e5d-487e-b99e-2f3283a4263b?iframe_resize_id=assessment_practice_id_7c936b58-9e5d-487e-b99e-2f3283a4263b\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<h2>Employee or Contractor?<\/h2>\n<h2><img loading=\"lazy\" decoding=\"async\" class=\"alignright wp-image-2494\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/4056\/2019\/10\/15185957\/female-865110_1920-300x200.jpg\" alt=\"Decorative image.\" width=\"400\" height=\"267\" \/><\/h2>\n<p>As an HR professional, it can be difficult to determine which way to go with this position that needs to be filled. Will the contractor be less expensive and more efficient, or is it time to bring a new employee on board?<\/p>\n<p>A contractor is the best choice when<\/p>\n<ul>\n<li style=\"font-weight: 400;\">The work requires a level of expertise no employee in the business has, and it would cost too much time and money to train someone to do it (e.g., IT specialty, an electrician, a physician)<\/li>\n<li style=\"font-weight: 400;\">The work is seasonal, and extra hands are needed to fulfill orders<\/li>\n<li style=\"font-weight: 400;\">The work is administrative, like bookkeeping or other tasks that can be done remotely and typically don\u2019t require a full-time employee<\/li>\n<\/ul>\n<p>An employee works best when<\/p>\n<ul>\n<li style=\"font-weight: 400;\">The work requires close supervision in order to be completed<\/li>\n<li style=\"font-weight: 400;\">The work requires regular local knowledge and an employee can bring specialized local knowledge to the table<\/li>\n<li style=\"font-weight: 400;\">The work requires extensive knowledge of what\u2019s going on within the walls of the small business<\/li>\n<\/ul>\n<p>HR professionals can help small business owners determine the cost and relationship benefits of a contractor versus an employee and can assist in avoiding any misclassification of either.<\/p>\n<h2>Sources<\/h2>\n<p class=\"hanging-indent\">Fleischer, Charles H.\u00a0<i>HR for Small Business: An Essential Guide for Managers, Human Resources Professionals, and Small Business Owners<\/i>. Naperville, IL: Sphinx Pub., 2009.<\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-1678\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Employees vs Contractors. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li><strong>Authored by<\/strong>: mohamed_hassan. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/illustrations\/multi-tasking-efficiency-manager-2840792\/\">https:\/\/pixabay.com\/illustrations\/multi-tasking-efficiency-manager-2840792\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/cc0\">CC0: No Rights Reserved<\/a><\/em>. <strong>License Terms<\/strong>: Pixabay License<\/li><li><strong>Authored by<\/strong>: picjumbo_com. <strong>Provided by<\/strong>: Pixabay. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/pixabay.com\/photos\/female-diary-journal-write-865110\/\">https:\/\/pixabay.com\/photos\/female-diary-journal-write-865110\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/about\/pdm\">Public Domain: No Known Copyright<\/a><\/em>. <strong>License Terms<\/strong>: Pixabay License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section><hr class=\"before-footnotes clear\" \/><div class=\"footnotes\"><ol><li id=\"footnote-1678-1\">Paychex, Inc. \u201c<a href=\"https:\/\/www.prnewswire.com\/news-releases\/new-paychex-data-shows-independent-contractor-growth-outpaces-employee-hiring-in-small-businesses-300775712.html\" target=\"_blank\" rel=\"noopener\">New Paychex Data Shows Independent Contractor Growth Outpaces Employee Hiring in Small Businesses<\/a>.\u201d PR Newswire, January 9, 2019. <a href=\"#return-footnote-1678-1\" class=\"return-footnote\" aria-label=\"Return to footnote 1\">&crarr;<\/a><\/li><li id=\"footnote-1678-2\">Internal Revenue Service. \u201cIndependent Contractor (Self-Employed) or Employee?\u201d IRS. Accessed March 6, 2026. https:\/\/www.irs.gov\/businesses\/small-businesses-self-employed\/independent-contractor-defined. <a href=\"#return-footnote-1678-2\" class=\"return-footnote\" aria-label=\"Return to footnote 2\">&crarr;<\/a><\/li><\/ol><\/div>","protected":false},"author":17,"menu_order":5,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Employees vs Contractors\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"mohamed_hassan\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/illustrations\/multi-tasking-efficiency-manager-2840792\/\",\"project\":\"\",\"license\":\"cc0\",\"license_terms\":\"Pixabay License\"},{\"type\":\"cc\",\"description\":\"\",\"author\":\"picjumbo_com\",\"organization\":\"Pixabay\",\"url\":\"https:\/\/pixabay.com\/photos\/female-diary-journal-write-865110\/\",\"project\":\"\",\"license\":\"pd\",\"license_terms\":\"Pixabay License\"}]","CANDELA_OUTCOMES_GUID":"42be0de5-27ca-4149-bcda-0342ccd6beef, b7814605-726b-4519-bac6-1c3d5fd3ca96","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-1678","chapter","type-chapter","status-publish","hentry"],"part":1642,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/1678","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":13,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/1678\/revisions"}],"predecessor-version":[{"id":3481,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/1678\/revisions\/3481"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/parts\/1642"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapters\/1678\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/media?parent=1678"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/pressbooks\/v2\/chapter-type?post=1678"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/contributor?post=1678"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-humanresourcesmgmt\/wp-json\/wp\/v2\/license?post=1678"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}