Pay-rolling and the Pitfalls of Contract Workers

It can be really tempting to hire contract workers. However, in the end, it is generally a better idea to work with a regularly-hired employee. You can end up saving yourself a lot of hassle and headache by working with an employee instead of an independent contractor.


First, consider the advantages of working with independent contractors. You’re likely to save your company a lot of money working with them since you don’t have to deal with paying for benefits, and, if the contractor is using their own equipment and space, you save that money, too. You can also avoid not paying your part of their Social Security and Medicare taxes, among other taxes and insurance, like unemployment and workers’ comp insurance. According to Forbes, this can raise your payroll costs by 20 to 30 percent, and maybe even more.

You can also hire contractors just for specific projects if your workload is higher at some times than others. You avoid the trouble of firings and layoffs. Additionally, contractors bring their specific knowledge to the job, which means you don’t have to spend time and money training. You can also avoid potential lawsuits for overtime compensation, discrimination, taking time off to care for a sick family member or to be with a new child.


Now that you know the upsides of hiring independent contractors, consider why working with them may not be all it’s cracked up to be.

For one thing, you don’t have as much control over your workers as you might like, meaning you can’t micromanage and direct the way you (may) do your employees. Contractors have some autonomy to do their work in a way that is best for them. If you get too involved in what they’re doing, they start looking like an employee to the IRS. The Bureau of National Affairs, in the September 9, 2009 “Daily Tax Report” states that “.  . .behavioral control is arguably the most important” factor in determining whether someone should be classified as an employee or contractor.

Another factor to consider is that your contractors will not provide the permanency of a regular workforce. All the new people in and out can decrease efficiency and cause some trouble in the work environment. Moreover, your right to terminate a contractor depends on the contract you’ve both signed. Also, if your contractor gets hurt on the job, they can sue for damages, unlike an employee, who is covered by workers’ comp insurance.

Whatever a contractor creates for your company may not exclusively be yours, either, unless there is a written agreement moving the ownership from the contractor to the organization. Employees who create something for a company automatically give up the copyright to the employer in most cases.

You may also face more audits from the government if you have a staff of mostly contractors. They may think you have misclassified them, and that can land you in trouble, not only with the IRS, but also with other federal agencies. The Bureau of National Affairs advises that “Employers who misclassify workers as independent contractors can end up with substantial tax bills. Additionally, they can face penalties to pay employment taxes and for failing to file required tax forms.”

So think hard before you decide to hire contractors instead of employees. In the end, it is likely better for your organisation to hire employees. If you’re not sure about whether to classify someone as a contractor or employee, the BNS that you consider the level of behavioral and financial control the organization has over the worker, and the type of relationship.