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Should You Hire an Employee or Contractor when Business is Booming

When it comes to employees and contractors is it a potayto, potahto situation? Not quite. More like apples to oranges.

Great companies are supported by great people. When your business is growing, you need to attract top talent and hard workers to maintain your momentum. But that talent comes with necessary compensation, legal responsibilities, and tax implications.

When it comes to hiring, especially if your business is seasonal in nature, all of these considerations boil down to one crucial question:

Do you want to hire an independent contractor or an employee?

The main difference between the two

While the difference can seem murky, the biggest difference comes down to taxes.

In the United States, when an employee is hired and paid a wage or salary, they must fill out a W-9 form. Using the information provided on this form, employers withhold the necessary taxes and pay them to the Internal Revenue Service (IRS) on a quarterly basis. At the end of the year, employers are responsible for providing employees with a W-2 form that indicates how much money was withheld. They use this form to file their state and federal taxes.

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While the difference can seem murky, the biggest difference comes down to taxes.

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This process is almost identical in Canada, but instead, employees have to fill out a TD1 form and receive a T4 which they use to file their taxes with the Canada Revenue Agency (CRA).

When it comes to the tax implications of hiring workers, you have more responsibilities as a business owner when you hire employees.

On the other hand, independent contractors are responsible for reporting and paying their own taxes. Employers have no obligations when it comes to paying into social insurance or employment insurance premiums (depending on which country, state, or province you’re operating in) on behalf of their employees.

That said, businesses in the United States are still required to report payments they make to non-employees on a 1099-Misc form.

Why can’t you hire everyone as an independent contractor?

You may be wondering why this even matters, or if you can just opt for the seemingly easier route and hire everyone as an independent contractor to avoid the tax obligations. Well, it’s not that simple.

If a payee disputes their status as an independent contractor come tax time and the arrangement is deemed an employee/employer relationship, you could be on the hook for paying the outstanding balance to the IRS. In Canada, this also means paying both the employee and the employer’s half of any owing premiums to CRA.

Which have you hired for your business?

The person you’re paying to work for your business is likely an independent contractor if:

  • They supply their own materials and equipment
  • They decide when they get paid
  • They determine their own hours
  • If the payer has a limited amount of control over the payee’s activities
  • Minimal supervision of work
  • They can hire subcontractors or assistants

The best way to protect yourself is to be clear about your work arrangement with a payee from the outset and get everything in writing to prove that you are both in agreement.

Legally speaking, as the employer you’ll want to draft an independent contractor agreement that your independent contractor will sign. Here is an example of an independent contractor agreement to give you an idea of what you’ll be drafting and signing. However, we recommend you consult a lawyer or an industry organization to ensure you draft a final contract that covers the specifics of your work.

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For instance, if you're hiring for a short term job, perhaps during a seasonal surge, then an independent contractor offers more flexibility.

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Aside from legal implications, how do you choose which is best for your business?

Even if you can choose to hire one or the other you should still think about which is in your business’s best interests.

For instance, if you’re hiring for a short term job, perhaps during a seasonal surge, then an independent contractor offers more flexibility. On the other hand, if you hire an independent contractor for a permanent role you have less control over when they work, what environment they work in, and who they hire to assist with tasks and materials related to your company, which may be a privacy concern for some business owners.

One arrangement is not objectively better than the other because it ultimately depends on a job’s unique needs. Whichever option you select, make sure you clearly communicate your expectations, ensure the person you’re working with is on the same page, and have your legal obligations in order.

Do you work in an industry where it makes sense to hire employees over independent contractors or vice versa? Share your perspective and advice in the comments below.

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