With the increase in the technological capacity of businesses, more people are choosing to become independent contractors. Being an independent contractor is a decision that most people make majorly because of the employment benefits.
On the other hand, more companies are shifting towards a remote workforce, and the need for such independent contractors is on the rise. However, there is still confusion on the benefits of casual labor vs contract labor.
Therefore, to choose between hiring an independent contractor or a permanent employee, a business should look at both pros and cons of hiring employees vs. independent contractors.
Independent Contractor Definition And Examples
According to the independent contractor definition, it has a short-term contract with a business, usually for a few days or per task. Independent contractor examples include freelancers who are independent and have relatively short-term contracts with a company. With an independent contractor, the business will usually not pay health insurance and other benefits. When you hire independent contractors, you only control the work results and not how they should work.
One of the best examples of independent contractors is a cleaning service company. When you hire a cleaning service, you can direct them where to clean and when to arrive. However, you can’t control what cleaning supplies they should use and how to clean the facility.
What is considered casual labor?
According to the IRS, casual labor is defined as labor done sporadically and within a short-term time frame. However, the law also stipulates the casual labor limits 2021 of $600 per year. Therefore, if a company pays a casual laborer more than this, it will be counted as full-time or contractual employment.
On the other hand, an employee is usually a full-time or part-time worker who contracts with a company based on a fixed timing schedule per week. The contract is generally for a more extended period, and the business cannot fire them for reasons other than what is stipulated in the contract. Employees are also liable to receive benefits such as pay increases and healthcare benefits.
The demand for independent contractors varies according to the survey method. Some surveys indicate that the percentage of workers becoming independent contractors is on the rise. In fact, according to a survey done by Gallop, more than 30% of all American workers are independent contractors. On the other hand, a survey done by the Labor Department shows that this figure is around 10%. The difference between these values is the stricter rules that the Department of Labor uses to define an employee.
While working hours affect the status of a worker, they are not the only indication. According to the labor department, the main limitation that defines whether a worker is a casual laborer or not, is the level of control the employer has over the work. When employers have significant control over how the work should be performed, then the worker will fall under an employee, regardless of the hours worked.
Independent contractor vs. employee test
While there are several ways to determine whether a worker is an independent contractor or employee, the preliminary employee vs contractor test has to do with the level of financial and other controls that the employer has over the worker.
With this in mind, it can be safe to say that an employee undergoes training and has to work under specific instructions. On the other hand, an independent contractor does not receive any formal training from the company and has more control over completing a task. Examples of independent contractors include contract workers and freelancers.
The level of financial control also differs when comparing independent contractors and employees. The independent contractor has less involvement with the business’s finances.
The employee can be affected by the profit or loss of the company, but an independent contractor will generally have a stipulated contract. Therefore, the level of financial control that businesses have over independent contractors is less.
Casual labor vs. Contract labor
Many people often confuse part-time labor with casual labor. While there are similarities between the two, they are two different things. Casual labor is labor that does not have a fixed long-term contract. They are less likely to be rehired by the business, and work is only provided when available. The company does not have to pay their medical insurance or other bonuses.
Contract labor is a temporary position, but it usually involves a longer term contract than casual labor. Most contracts are for 3-6 months. During this period, the employer is responsible for paying insurance and other benefits to full-time employees. Part-time labor is therefore regarded as an employee.
IRS rules for casual labor
When it comes to paying taxes on casual labor, the IRS has particular rules regarding casual labor deductions. While previously, employers did not have to record payments of casual labor under $600 to casual work as part of wages, but new regulations state that all forms of labor are taxable. Therefore, payments made to casual labor will also be taxed under the new IRS regulations.
Pros and cons of hiring employees vs independent contractors
While the data has varied on whether companies rely more on employees or casual labor, each one has its benefit. And these benefits and disadvantages are referred to as the independent contractor vs employee checklist.
- Employees make up more than 89% of the US workforce, according to the Department of Labor. The major advantage of hiring an employee is that you get complete control over how the work is performed.
- There is also more reliability and businesses do not have to worry about recruitment costs every other day.
- Employees also help the company grow and can comply with the long-term vision. However, the business has to incur expenses like payroll tax, unemployment benefits, FICA taxes, and insurance benefits. This makes hiring employees costly at times.
Independent contractors are not part of a long-term workforce, and they don’t come with long-term reliability. However, they do have the benefit of not being liable for insurance expenses and other compensation. As a result, cost-saving is a significant factor when it comes to hiring independent contractors. This savings can be as much as 30%, according to Businessweek Magazine.
When deciding on which type of employee to hire, you may consider a few factors like cost, reliability, and expertise. However, make sure that your business categorizes its workers correctly to avoid issues with the IRS and other authorities.
Contact MartinoWest and we will match your business with a suitable all-inclusive work comp option, such as a Professional Employer Organization, that can assist with all employee-related matters. Give us a call at 855-924-1597. MartinoWest will source and present options suitable to your business size, industry, and location.