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Is Switching From Employees to Independent Contractors a Downgrade?

Mar 31, 2021 | Business

The company you run has been in the family for generations. Most of the employees have been around for a while and have literally built the business from the ground up. But times have changed since your great grandfather started the business. There are so many technological advancements, and you need to make some tough decisions. Perhaps running the business with full-time employees has become too expensive, or maybe some positions are now redundant. Whichever the case, you may find yourself contemplating reducing the number of permanent posts in your business. However, you’re probably wondering if changing your employees to independent contractors will be a downgrade. 

Relax… In this article, we highlight the merits and demerits of both salaried employees and independent contractors. But first, let’s get the difference between the two. 

Independent Contractors vs Employees: What’s the Difference?

Most people will dismiss the distinction between contract workers and employees as irrelevant. However, classifying those who work for you as either employees or contractors is crucial for tax and insurance purposes. 

The IRS defines an employee as someone who offers a specific service to a business where the employer controls all operations. The business owner decides everything and determines the work location and schedules. Employees fill W-2 Forms that show their pay, tax deductions, and benefit plans. 

On the other hand, a contractor is an independent worker who controls all aspects of their business. Although they may offer similar services to salaried employees, they can work from wherever they want, set their business hours, and choose what services to offer. Contractors usually fill Form 1099 to record their income from clients. 

Unlike salaried workers, contractors don’t have a stable income, hence the common misconception that employees are more stable. However, this is necessarily not the case, as both options present the pros and cons. 

Benefits of Independent Contractors

The most significant advantage of using contract workers for your business is that it reduces costs significantly. Independent contractors can work remotely or over limited periods. 

You won’t have to cover Medicare or Social Security taxes, and you’re not obliged to maintain the worker during unemployment. These factors help to cut down the business’s overhead expenses. 

The detriment of having no control over the worker’s hours is that everything operates under the contractor’s schedule. If a business emergency occurs, you’ll probably remain stuck until you can get a hold of the worker. 

The upside of this option to contractors is the freedom that comes along with it. As an independent contractor, you can set your schedules, rates, what jobs to take up and which ones to turn down. 

On the flip side, you may not enjoy financial security as someone on payroll. You never know when the business could go haywire, which is why you must ensure that you’re earning more as a contractor. 

Advantages of Salaried Employees 

With salaried employees, you control how everything runs, which is the primary attraction to this model. You get to choose how your business handles its clients, and all your employees have to comply with the company policies. 

Additionally, having permanent employees will be less of a hassle. You’re not working around anyone’s schedule and don’t have to go through the tedious process of hiring and to handle a contractor. 

For the employees, this option provides some financial security. Your employer pays your taxes and funds your retirement fund. On the flip side, you have an inflexible schedule subject to the company’s operating hours. 

Switching from employees to independent contractors isn’t exactly a downgrade. It comes with both good and bad, and you’ll need to do your research to determine whether it’s the right move for your business. 

Who We Are

At Bright R, we believe that keeping your employees happy plays a crucial role in your business’ success. Therefore, we are committed to providing the best employer services for your Canadian workforce. Get in touch with us today or read through our blog for more information on what goes on in the workplace. 

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