The time comes for every successful home-based business owner
when one person can no longer do it all. In the early days of your
fledgling business you accepted that not only were you CEO, CFO,
COO, secretary, treasurer and marketing director, you also had to
be laborer, receptionist, janitor, chief cook and bottlewasher. That
is simply what you have to do when starting out. In fact, I'll bet you
worked harder in your "little home business" than you ever did in
your former life as corporate whatever, right? But now the time has
come. You have successfully taken your business past the initial,
maddeningly slow, frustrating start-up phase to the point where
you're seeing some growth... so much growth in fact that you're
finding it near impossible to keep all the balls in the air.
The time has come to hire some help. OK, but what kind of help
do you need? If it's a secretary/receptionist, that's easy. You go
out and hire yourself a competent employee. But what if it's someone
to carry out specific projects such as designing a website for a
good customer you just can't service within the timeframe the
customer needs? What if it's someone to create a marketing
program to launch your business to the masses? What if it's a
bookkeeper to handle your accounts payable, receivable and
everything else in between? The difference between these types of
activities and our secretary/receptionist example is that the former
are all specific projects whereas the latter is not.
When considering whom to hire for your project work, you have a
choice... hire a full-time or part-time employee or hire an
independent contractor. By the time you include all the add-on
costs of hiring an employee (in addition to wages or salary you need
to add on federal and state payroll taxes, social security tax,
federal unemployment insurance tax, state unemployment
insurance, workers' comp premiums and employee benefits,
not to mention shelling out for office space and equipment), hiring
an employee becomes a relatively expensive option compared to
hiring an independent contractor to do the same work. The add-on
costs of hiring an employee usually add about 30-40% to the
bill. In other words, if you pay your employee $10 an hour, you'll
really be paying $13 - $14 an hour once you include all the add-on
expenses.
In contrast, although you usually pay an independent contractor
more than an employee, that cost will still be less than an employee
with the add-on expenses. You may pay an independent contractor
$12 an hour without any additional charges. Sound good? Well,
read on. It's not as easy as it looks.
WHAT IS AN INDEPENDENT CONTRACTOR?
So, what is the difference between an employee and an independent
contractor anyway? Quite simply, an independent contractor is
someone who contracts with someone else to provide specified
services for a set price on terms and conditions outlined in the
contract.
For example, let's say you hire a gardener to mow your lawn and
get rid of weeds once a week. Your contract (whether written or not)
is that Joe Gardener will arrive at your house on Friday morning,
mow your lawn, get rid of weeds and generally tend to your garden.
In exchange, you agree to pay Joe $40 for this service each week.
Joe supplies his own lawnmower, hedge clippers and weeding tools.
Joe decides what time he arrives and how long the job takes (within
reasonable parameters). You do not supervise Joe in his tasks or
dictate to him how they are to be done. Joe is an independent
businessperson and you treat him accordingly. The final product
is either to your satisfaction or it isn't. When he's finished, you pay
him if you're satisfied with the end result and you don't pay him if
you're not.
Contrast this with an employer/employee situation. Let's say
you own the business Joe's Gardening Service. You employ
three employee gardeners to perform services for your business.
As the gardeners' employer, you pay them a fixed wage and you
withhold taxes, unemployment insurance and various other
benefits from their wages to remit to the appropriate government
agencies. In addition, you provide your employees with the tools
and equipment they need to perform their work. You tell them what
to do and supervise them while they're doing it. At the end of the
job they get paid by you whether your customer is satisfied with
the job or not. In other words, although your customer may not
pay you (the independent contractor) because she is dissatisfied
with the work performed by your employees, you must still pay
your employees because they are not independent contractors -
they are your employees and are entitled to be paid a fixed wage.
If you are dissatisfied with their work, you can fire them but you
can't decide whether to pay or withhold their wages based on the
end result of the particular project.
ADVANTAGES OF INDEPENDENT CONTRACTORS
> Cost
As mentioned above, the main advantage of independent
contractors versus employees is cost. You can get the same
or better service from independent contractors for a lower hourly
rate than you can from employees because you don't have to
incur all the add-on expenses that go along with hiring employees.
> Equipment and Materials
In addition, you don't have to provide office space or materials
and equipment to independent contractors. As independent
contractors (who may also go by the terms "freelancers",
"consultants", "self-employed", "business owners" etc.) are
self-employed business people, they have their own "tools of the
trade". If they're website designers, they have their own office
space, computer and printing equipment. If they're gardeners,
they have their own lawn mower, whipper-snipper, wheelbarrow
and pruning shears.
> Legal Liability
At law, an employer is vicariously liable for the torts of his or
her employees. This means that if you hire an employee gardener
who accidentally runs over your customer's pet cat in the driveway
of her home when the customer had made it clear that your
employees are always to park in the street, in addition to suing your
employee for negligence, she can also sue you, the employer, as
you are vicariously responsible for the acts of your employees. (And,
by the way, this applies whenever your employee is acting within
the scope of employment, whether under your express instruction
or not. If your employee has a car accident when traveling between
jobs and his negligence at least partially caused the accident,
you're responsible to the same extent as the employee.)
This is generally not the case with an independent contractor unless
the independent contractor has been engaged to perform an inherently
dangerous activity (such as blasting) or you have attempted to
delegate to your independent contractor a non-delegable duty (such
as keeping a rental property you own in good repair for the benefit of
the tenant).
In addition to minimizing legal liability for torts, hiring independent
contractors also minimizes your liability for other types of lawsuits
such as wrongful termination or job discrimination.
DISADVANTAGES OF INDEPENDENT CONTRACTORS
There are two main disadvantages to hiring independent contractors
versus employees.
> Misclassification
Far and away the most serious disadvantage is if you misclassify
employees as independent contractors. Merely labeling a worker as
an independent contractor is not enough. They must actually be an
independent contractor.
If you do misclassify an employee as an independent contractor, you
must pay the IRS all back-taxes owed, plus interest, plus penalty
(12% - 35% of the total tax bill).
Also, you expose yourself to an increased risk of state audits when
your terminated independent contractor files for unemployment
benefits. Never mind that you and your independent contractor
intended that there be no employer/employee relationship, many's
the disgruntled independent contractor who unilaterally decides to
recategorize the relationship as one of employer/employee when
the spectre of unemployment benefits raises its pretty head. In such
situations, you'd better be able to protect yourself by proving that
the arrangement was for an independent contractor and not an
employee.
> Legal Liability
Unlike an employee who is limited to workers' compensation
benefits, an independent contractor can sue you for negligence if
they're injured on the job. That's what liability insurance is for
though.
About the Author
Elena Fawkner is editor of A Home-Based Business Online...
practical home business ideas for the work-from-home
entrepreneur.
http://www.ahbbo.com