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If your business is expanding and you need to hire additional help that is great news! You might be wondering whether to hire an employee or an independent contractor. This is an important decision, and should be made carefully to avoid potential future liability and to protect your company.
The first consideration is often the company’s bottom line – which is more cost effective? Sometimes companies believe that hiring an independent contractor in place of an employee will save the company on payroll taxes and employee benefits. However, independent contractors, who bear the full brunt of self-employment taxes and benefits, generally command a higher rate of pay. Furthermore, what the company might save on office space, equipment, and paperwork with a contractor, it may lose in the way of employee loyalty.
A second important consideration is what will the government say? Various state and federal agencies are concerned with how you classify your workers, and each applies a slightly different test to arrive at the answer. Common factors include: the type of work being performed, the level of control the company exerts over the worker, and whether the worker has other clients. Failure to correctly classify a worker may result in the company being assessed with back payroll taxes and penalties.
A final consideration involves employee or independent contractor agreements. Employment agreements for key employees will help protect trade secrets and other confidential information. On the other hand, independent contractor agreements with all contractors are critical to help prevent future disputes and to permit the company to retain copyrights in works created for it by the worker.
In summary: analyze the practical and legal worker classification for your company’s situation, then consider how to protect your investment with the appropriate agreement to clarify the relationship.
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