Employee or Contractor? What's the Difference?
SHOULD I HIRE AN EMPLOYEE OR CONTRACTOR? WHAT'S THE DIFFERENCE?
Assuming you have considered how you want your business to look like in the future, whether you decide to recruit a team of employees or opt for a network of third-party contractors largely depends on this.
Let’s look at how both employees and contractors are best suited to different business structures and the pros and cons of incorporating each into your model.
Every business decision and financial crossroad encountered can ultimately affect both your short and long-term profitability. The Profit First concept is a beneficial guide designed to help your business become more profitable sooner.
Find out more about our Profit First packages and assessments today.
Employees vs. Contractors – Compatibility
Small business and entrepreneurial dynamics are often complicated when it comes to daily operations, management, finance and of course, hiring personnel to help you run things.
Seeking and selecting individuals or other businesses to share your concepts and passions as well as aid your business growth can be a seriously tough job. However, hiring suitable people regardless of the agreement (i.e. employees or contractors) is imperative to successful management and ensuring all aspects and departments carry on smoothly.
Here’s some further information on employees and independent contractors explaining how to differentiate the two and make better-informed decisions in relation to who you require.
Who is considered an employee?
An employee is someone working within an explicit contract under the control of the employer and terms exclusive to that employer or business.
Put simply, this means as an employer you have the right to instruct employees to conduct desired activities as part of the working agreement in accordance with the outlined performance expectations.
If you’re seeking this level of convenience in terms of direct control over who completes certain tasks and when they are to be initiated, then perhaps hiring a team of employees is more suitable for your business.
Who is considered a contractor?
A contractor is a third-party individual or business hired externally on a contractual or ‘per job’ basis in which you and the contractor enter into a mutually suitable agreement to have the specific task(s) completed.
Contractors are under limited control of who they work for and are free to work with multiple organisations at once. Independent contractors also generally work to their own schedules and aren’t obligated to fulfill as many job-related requirements as employees would.
Usually hiring of contractors is more suitable in circumstances such as a task being outside your expertise, when a certain job is time sensitive and requires little supervision, or when employees aren’t necessarily the most compatible option due to wanting to limit your obligations.
Employees – Pros and Cons
§ Complete control over task direction for employees.
§ Conditions can be proposed that better align with your requirements - e.g. having someone work exclusively for you, availability terms etc.
§ Must comply with payroll and tax requirements. Contact Ironbark Industries Bookkeeping today for help and advice with all your payroll management needs.
§ You’re responsible for overtime payments and providing a range of other entitlements.
§ Terminating employees can be difficult and time consuming.
§ Risk of possibly having to pay worker’s compensation and other liabilities.
Contractors – Pros and Cons
§ Although a Taxable Payment Annual Report (TPAR) and superannuation may still be required and payable, tax and payroll obligations may be more simply defined for contractors.
§ Ease of agreement – Paying for a specific job or project to be completed is about the extent of your financial connection with a contractor.
§ Not responsible to pay leave entitlements.
§ They are often professionals in a specific field making for a more timely and cost-efficient business solution.
§ Hiring and termination processes are far less extensive and can be conducted within faster turnaround times.
§ They may opt to use their own equipment or facilities.
§ Contractors are solely responsible for organising and paying their own insurance.
§ Limited control over the methods used to complete tasks.
§ Contractors may be working for numerous businesses at once restricting their availability to work exclusively on your task when needed.
§ You may experience difficulty acquiring invoices and making future contact with a contractor.
Should I hire both?
Integrating a balance between hiring both employees and a few contractors for industry-specific projects is a common and effective method of business operation we see today.
Most modern businesses vary wildly in capabilities and offer spectrums of services that extend far beyond one-dimensional proficiencies.
Depending on the scale of your business and the extent of the direction you plan to take it, mixing up your hiring structure may be an effective, newfound strategy for your business.
Just keep in mind you’ll need to consider and implement the tax, payroll and other financial obligations of both worlds into your day-to-day operations. While this sounds complicated, the pay-off for your business regarding certain tasks over the long run might still be worth calculating.
Establishing a business and developing a recognised branding position within your market is going to be surely challenging at the best of times. However, making your mind up on whether to utilise the benefits of having your own employees or take advantage of the pros of outsourcing, may just be one of your most difficult decision yet.
Although many businesses will start out with contractors early in their venture later switching to a predominantly employee-based model, it’s still imperative to get things right the first time around laying the correct foundations for your future plans.
See our other recent articles including Characteristics and Essentials to Make Your Business Profitable for further information on developing more effective plans for improved business management.
Contact Ironbark Industries Bookkeeping for enquiries regarding managing employee and contractor finances, conducting a Profit First instant business assessment or to discuss all other bookkeeping requirements.