Cutting Risk on the Cutting Edge:
Contractors or Employees? Choose Right for Best Results

As IT professionals choose between hiring an independent contractor or an employee (either part-time or full-time), there are many factors to take into consideration. Taxes, liability, IT consultant insurance, and finances all come into play.

So how do you choose between hiring contractors or employees? In order to manage your financial risks, you'll need to understand the differences between these two types of hires and what financial commitments each involves.

What's the Difference between a Contractor and an Employee?

Not every worker you hire can qualify to have independent contractor status. Rather than offer a legal definition for contractor, employment laws actually outline a series of factors that can make someone an independent contractor. A worker can qualify as an independent contractor if they…

  • Work independently.
  • Are paid on a per-project basis.
  • Use their own tools, resources, and methods to accomplish each project.
  • Maintain a contractor relationship with the business that hires them and don't receive benefits (other than payment) for their services.

While these are the general criteria, there's actually no clear-cut legal difference between a contractor and an employee. Judges rule on a case-by-case basis. In an employment lawsuit, judges typically rule that the worker is an independent contractor if they meet most of the above requirements. But if the contractor is heavily supervised, a judge could rule that the worker should be treated as a common-law employee and is owed the benefits normally given to employees.

Before you hire a worker as an IT independent contractor, make sure they meet these criteria! If you have any questions, see the IRS page on the differences between independent contractors and employees.

What Insurance Do You Need for IT Contractors and Employees?

Insurance and tax requirements can be complicated, but let's go over some of the common small-business requirements you must meet when you make new hires:

  1. Technology Workers' Compensation Insurance. You only need to purchase this coverage for employees you hire, not for contractors. Almost every state requires Workers' Comp Insurance, but some states offer exceptions for micro businesses (generally those with fewer than five employees). Check your state Workers' Comp laws, or contact your insurance agent to see if you need this insurance for any new hires.
  2. Unemployment insurance. This is called "insurance," but it is not an insurance policy. It's a tax you pay for every employee you hire. This tax funds unemployment benefits. You don't have to pay this for independent contractors.
  3. Income and other taxes. You must withhold federal income, Social Security, and Medicare taxes from employee paychecks. You don't have to take out any taxes from independent contractor payments.
  4. Technology E & O Insurance. If you work as a project manager or general contractor on an IT project, you might have to hire subcontractors. Your clients might require you and any consultants you hire to have Errors and Omissions Insurance. If your subcontractors don't have IT contractor insurance, you can either require them to purchase it or temporarily add them to your policy as an additional insured. (Your agent can help you if you want to go the additional insured route.)

When to Hire a Contractor Instead of an Employee

When you hire an independent contractor, you're only committing to them for the duration of the contract. If an IT project manager hires a contractor for a three-month project, they're only committing to that contractor for three months. Naturally, this means that it's smart to hire contractors for short-term projects.

Using independent contractors makes sense for small businesses that don't have the budget to commit to long-term employees. If your business is going to be swamped with work for a few months, using IT contractors can also help you manage the additional work.

When to Hire an Employee Instead of a Contractor

Hiring an employee means you'll be committing more financial resources to their work. You'll offer them…

  • Technology Workers' Comp Insurance benefits.
  • Unemployment taxes.
  • Social Security and Medicare taxes.
  • Income taxes.
  • Health insurance benefits (optional for businesses with fewer than 50 employees).

In addition, you're committing to that employee for the foreseeable future. You're investing in someone, teaching them the ins and outs of your business, and hoping that they will contribute to your company for a while to come.

Case Study: When to Hire Independent Contractors

A database administrator hires an independent contractor to help on a data migration project from a customer relationship management system to a SaaS provider like Salesforce. The migration is a big project but it will have a set end date. Because the worker will only be needed for this project, it makes sense to hire an independent contractor with database migration experience.

Case Study: When to Hire an Employee

A web designer has been busy for months. The designer is excellent at building visually appealing webpages, but it takes her forever to write the content for the pages. While HTML, CSS, and JavaScript are no problem, the English language still gives this designer problems.

The designer decides to hire a copywriter who specializes in SEO writing. In this case, because the web designer is often overwhelmed with work, it makes sense for her to hire an employee (especially one who has an expertise that will complement the business's needs).

Independent Contractor vs. Employee: The Takeaway

As you decide whether to hire a contractor or an employee, remember these four things:

  1. Hiring employees means you'll need to dedicate more resources to taxes and employee benefits.
  2. IT contractors should be used for short-term and self-contained projects.
  3. Even if you hire an independent contractor, a judge could rule that they are a common-law employee if you treat them like an employee.
  4. It's smart to hire employees when your business is expanding, you're looking to add expertise to your company, and you have the long-term revenue to support paying them.

Whether you've hired a contractor and need more E&O Insurance or you've taken on an employee and need Workers' Comp to meet your state requirements, insureon's agents can help you find the right coverage. Just submit an online insurance application, and let our IT insurance experts go to work for you.

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