1099 Employees: Costs vs. Savings

If your business has a job or project that needs to be done, you will have to decide how to go about hiring staff to do the work. Many business owners opt to hire independent contractors as doing so brings many financial advantages to employers. There are disadvantages inherent in hiring independent contractors as well. It is important to ensure that your hiring practices are legal and won’t land you in trouble with auditors. This article will help you weigh the costs versus the savings in order to make the best decision possible for staffing your projects.

We’ll start with the costs you might incur when hiring an independent contractor:

You will increase your visibility during audits from the government. As the government’s income comes from taxation, it is to their benefit to have as many workers as possible considered to be employees of a business. After all, independent contractors are required to report their own income for tax purposes and it’s easier for them to underreport their earnings than it is for employees. As a result, the government has a strong incentive to keep an eye on businesses that are employing independent contractors.

State and federal agencies will be looking to audit you if they think your employees have been incorrectly classified as independent contractors. The IRS might audit you, as well as state tax agencies. The Department of Labor will be looking to enforce the federal minimum wage and other state and local agencies might audit you for various other reasons.

You may also face liability if you terminate an independent contractor’s services. You are generally able to terminate the services of employees without restriction. This is not the case with independent contractors. Your ability to terminate their services depends on the written agreement that you both sign.

If you attempt to fire a 1099 employee in a way that violates your written agreement, it might be possible for them to sue you for breach of contract.

You might not own the works that independent contractors create for you. When an employee creates intellectual property – including but not limited to books, photographs, and articles – you will automatically own the copyright under most circumstances. On the other hand, if such intellectual property is created by an independent contractor, you may not own it by default. This can cost you in the long run.

All that said, here are some of the savings you can look forward to with 1099 workers:

You will save on hiring expenses. Generally, independent contractors are paid at a higher hourly rate than employees of a business are; however, you will save money on a number of other expenses. For example, you will not need to provide office space to an independent contractor. You also won’t have to shoulder the cost of your employee’s Social Security and Medicare taxes, nor will you have to pay towards state unemployment insurance or worker’s compensation insurance.

You will face a lower risk of lawsuits. In the previous paragraphs, we mentioned that hiring independent contractors can potentially open you up to certain liabilities; however, there are other lawsuits you will have a greater chance to avoid.

Under federal and state laws, employees have a variety of rights that can potentially open employers up to legal action if those rights are violated. Many of these laws do not protect independent contractors. For example, there is no minimum wage law and no overtime benefits for independent contractors. They are not protected from discrimination based on national origin, color, religion or gender, although they are still protected from race discrimination. Independent contractors are not guaranteed the right to take time off due to things like a sickness in the family.

If you have employees, they have the ability to sue their employer for wrongful termination. Independent contractors do not have this ability. As we mentioned earlier, you’ll have to take care that your written agreement is carefully worded so as not to open yourself up to potential breach of contract lawsuits.

You will also have more flexibility when it comes to staffing. Many businesses have busy periods and slow periods, with occasional big projects that require more staff than normal. In this case, using independent contractors can save you a great deal of expenses in hiring and terminating workers.

With employees, you will have to spend a great deal of money in hiring and training them, which you can avoid with independent contractors. You will not need to worry about letting employees go after the project is over as independent contractors will move on as soon as their contract is up.