Businesses can retain workers through various types of engagements, but many have to choose between designating them as employees or contractors. This sometimes-tricky decision can result in different costs, benefits, and other elements worth considering carefully. Below, we’ll explain remote employees vs independent contractors, and show you the differences between the two.
What’s The Difference Between a Remote Employee and a Contractor?
Let’s briefly cover the basics of remote employees vs independent contractors.
What is a Remote Employee?
The Internal Revenue Service (IRS) says, a person is considered an employee of your business or company if you can control their work and how it’s done. In short, you have control over their service details and how said service is performed. Beyond that, remote employees include any employee that work outside a traditional office environment.
What is an Independent Contractor?
Currently, the IRS defines an independent contractor as someone whose work is directed or controlled by a company or business. However, the business cannot control how or when the work will be done. Most of the time, the client simply sets a deadline, and the contractor delivers without significant oversight.
The Three Breakdown Categories of the IRS and Why The Distinction Matters
For both remote (and regular) employees compared to independent contractors, the concept of control is the primary distinction that businesses need to understand. The IRS breaks down the essential differentiating criteria into three basic categories;
- Type of Business Relationship: Does your business or company decide how, where, and when workers do their jobs?
- Behavioral Control: Who decides on the terms of payment involved for the work performed, you or the worker?
- Financial Control: This factor is determined based on contracts, employment agreements, and the length of time a business and individual have worked together.
Individual state regulations also factor into what constitutes an employee vs. an independent contractor. For example, many states use federal IRS designations as a baseline, but also consider how economically dependent a worker is on a company or business as a further indicator.
The distinction between employees and contractors matters for compliance, since businesses can take advantage of workers by misclassifying their status as contractors. Furthermore, it allows businesses to avoid providing benefits or paying certain taxes. As a result, the federal government and state tax authorities maintain strict criteria determining independent contractors vs remote workers.
Remote Employees vs. Contractors: Hiring Costs to Note
Employees often come with additional hiring costs that independent contractors don’t require. For example, take these potential costs:
Remote (or In-Person) Employees:
- Job training
- Payroll taxes
- Social Security
- Health insurance
- Workers compensation
- Disability and unemployment insurance
- Other benefits and perks (either required by states or offered by businesses)
- Dental and vision insurance
- Commuter benefits
- Professional development stipends
- Hourly rates or project-based fees (depends on the skills and experience of the contractor, the work in question, and other factors)
Do Employees Always Cost More for Businesses?
Many contractors pay their own benefits and self-employment taxes. As a result, they often charge higher fees than salary employees require. Additionally, experienced contractors tend to charge even more than their less-seasoned counterparts.
Remote Employee or Contractor: Which is Right for Your Business
Several important factors can help you make the best decision for your business or company. For example, does the project require specialized skills? Or, is the work outside your business’s core of offerings? In that case, an independent contractor may be a better choice. However, if you have several long-term projects that involve high levels of collaboration and are central to your business operations, then hiring a remote employee would likely be the optimal solution.
In addition, businesses must look at their budget to determine the best type of worker. Companies must balance the task at hand, desired expertise, cost, and more. Thankfully, businesses can leverage a wide array of quality online resources to determine which options best suit their needs.
Final Factors to Consider
Choosing between a new remote employee and an independent contractor to handle your business’s projects can be tricky, but that doesn’t mean the situation is impossible! Our experts at the Tax Hack Accounting Group sincerely hope that the above information has helped you learn about the essential factors you’ll need to consider before deciding on a remote employee or a contractor. For more information on everything from taxes to finance, please consider exploring our array of quality services!
Correctly filing your business taxes can be a serious challenge, especially for newer businesses starting in their respective industries. Thankfully, our specially trained tax professionals at the Tax Hack Accounting Group are here to answer your questions and review your information to make the process as easy as possible! Get started now with a one-on-one strategy session with a Tax Hack pro!