Independent Contractor vs Employee: Which Is Better for Your Private Practice?
Learn the pros and cons of hiring independent contractors. Find out if a contract worker or employee is better for your private practice.
As you grow your wellness business, you will notice that the workload will quickly become too much for one person, especially as you manage your clients as well as the administrative side of your business. Bringing on another provider, an administrative assistant, an office manager, or an intern is a natural next step for your expanding business.
When you bring on another team member, there are a few things to take into consideration. The most important is how you will classify that worker: as an independent contractor or employee. Each position has its pros and cons, and depending on the services you need completed, you will be legally required to classify your employee as one or the other. Here, we’ve broken down exactly how the IRS defines a contractor and an employee, the benefits of each, and how to determine if it is better to hire an employee or contractor for your wellness business.
Independent Contractor vs. Employee
It’s important to understand exactly how the IRS defines contractors and employees before deciding which to hire in your practice. The IRS has three determinants of worker status: (1) behavioral control (2) financial control and (3) type of relationship. We will explain what factors within these categories determine worker status.
According to the IRS, anyone who performs a service for you is considered an employee if you can control the work that will be done, and how it will be done. Even if you give your employee freedom of action, if you control the details of how the work is done, they are your employee. More specifically, if you decide work hours, work location, and provide training, evaluations, and materials, then that worker is definitely an employee. As for financial control, if you pay your worker a salary and they are not allowed to work for anyone else, they are also classified as an employee. Additionally, if they are entitled to any type of benefits, they would also be considered an employee. The type of relationship you have with this worker can also determine their worker status: if the work is going to be ongoing and long-term, your worker is an employee. If they are considered integral to the core operations of the company, that would also cause them to be an employee.
Independent contractors, on the other hand, are workers who are contracted to complete a service for another business as a nonemployee. While you determine the deliverables of the service, you as the employer may not determine how, when, and where the work gets done (with the exception of setting a deadline). Independent contractors often use their own materials and tools to complete the project, and do not require training or evaluation. In regards to finances, contractors are paid a set or hourly rate, but are not entitled to any benefits and must pay self-employment taxes. Contractors are usually used for short-term projects that are not part of the company’s core work; for example, you could contract someone to train employees on a new software program.
Overall, the IRS has set a clear distinction between an employee and a contractor. You cannot simply choose whichever works best financially and logistically for your company; if you are audited and the IRS discovers you have wrongfully classified a worker, you could be subject to thousands of dollars in fines. Even if a worker agrees to become a contractor, you must still consult the IRS’ guidelines so that you can be compliant and avoid incurring financial penalties. If you need more clarification, you can always fill out an SS8 form to submit to the IRS to confirm.
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Pros and Cons of Hiring Independent Contractors vs Employees
✓ More Control Over an Employee
Employers who hire employees have much more control over their workers than if they were contractors. As mentioned above, employers can determine the time and place that their employees complete their work. They train employees on how to complete their daily tasks, evaluate them on progress, and will provide certain materials for completing their job. The employer can set hard deadlines and workflows for the employee. Basically, the employer retains the majority of control over their employees.
However, when employers hire a contractor, legally, they have much less control over the way contractors render their services. Naturally, the employer and contractor will work together to determine the deliverables and deadline for the project, but beyond that, the employer does not have control over the minutiae of the work. The contractor can determine when, where, and how they complete their work. They are likely to provide their own tools and materials. They don’t require training or performance reviews, and the relationship will end once the project has been completed. Many contractors are experts in their specialty, so they tend to need less managing anyway. If you are a detail oriented supervisor, and like to be heavily involved in projects, a contractor would not be the best fit.
✓ Less Financial and Legal Burden for an Independent Contractor
On the other hand, independent contractors are advantageous for private practices because of the low financial and legal burden incurred on the employer. For one, contractors are usually paid a set or hourly rate for their services, and the employer is not responsible for any part of their taxes. Most independent contractors pay self-employment taxes out of their earnings, meaning it is their responsibility to manage a tax and payment schedule. Additionally, because they are workers for a shorter period of time, contractors are not offered any benefits packages from the employer.
Employees, however, can come with many more laws, regulations, and expenses. Employers must regulate employee wages or salaries, overtime, unemployment and worker’s comp insurance, among other financial responsibilities. Employees usually receive benefits packages from their companies, which can include health insurance, wellness programs, vacation days, etc. Employers must also pay half of every employee’s FICA taxes. Despite the fact the pay rate may be the same between an employee and contractor, the additional benefits, responsibilities, and commitment required for an employee can raise the cost to their employer.
✓ Contractors Offer Expertise and Flexibility
Because they spend all of their time working within one specialty, independent contractors are likely to be very good at what they do. Employers should not have to spend time training contractors on how to complete a project; the appeal is that they should already know how to do so in a quality and timely manner. They can offer this expertise in areas where it wouldn’t make sense to hire a full-time employee, like in the example we used earlier. If you need to train staff on a new software, hiring a full-time employee would not make sense; you likely only need this worker for a short period of time, for certain hours of the day. A contractor who specializes in this type of training would be a better fit for this type of project, because it is short term and requires expertise. Using contractors can also allow for financial flexibility; many small businesses have fluctuating levels of business throughout the year. Using freelancers for certain aspects of business reduces the burden of having a large staff during slower periods. During busier periods, independent contractors can take on extra work that would be too much for full-time employees to do, on top of their own responsibilities.
Overall, deciding if it is better to hire an employee or contractor is entirely dependent on the services you need fulfilled. Regardless of the pros and cons of each, you must take into account the IRS’ classifications of each type of worker and see which is closer to the job you need to get done.
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