What Business Owners Need to Know About Contract and Freelance Workers

Many companies elect to use contract or freelance workers, especially when they need extra help but not enough to justify hiring a full-time employee.

In general terms, freelancers are independent workers who pay self-employment taxes and usually don’t have employees beneath them. They have full control over their work, including how often they work, when they work, and their work hours.

Although often used interchangeably, the terms “freelancer” and “contractor” don’t mean the same thing. Like freelancers, contract workers set their own hours and have full control of their work. However, contractors are generally hired on a project basis, meaning they work on one large project for their contract duration or serve a single client.

For legal and taxation purposes, both contract and freelance workers are known as 1099 employees. When your business works with a 1099 employee, you do not deduct income taxes from their wages as they pay self-employment taxes independently.

Why Work with Contractors and Freelancers?

There’s a variety of circumstances in which it makes more sense to hire an independent worker instead of an in-house employee. Some common reasons people hire contractors or freelancers include:

  • Outside Expertise– Your in-house team may have a skills gap they need to fill to complete a particular project. Instead of hiring a full-time employee for a role you won’t need beyond the project’s scope, you can hire an outside expert for just the duration of the project.

 

  • Seasonal Help– Depending on your industry, there’s likely a time of year where business picks up, and you need more hands on deck. Rather than hiring new employees only to let them go once the surge ends, you can hire freelance or contract workers to meet the increased demand during the busy season.

 

  • The Labor Costs Less– When you work with independent contractors or freelancers, you do not have to offer them benefits, reducing costs.

 

  • Less Legal Exposure– Full-time employees have more legal rights than freelancers and contractors, meaning you have fewer liabilities to insure.

What Makes Contractors and Freelancers Different Than Typical Employees?

Contractors and freelancers are different from regular employees in a variety of ways. Most significantly, hiring businesses aren’t legally required to pay them a certain wage, take taxes out of their paychecks, or provide other benefits.

The type of work they do is generally different, too. Companies typically only hire freelancers or contractors to do work that can’t be done by their regular employees. Contractors and freelancers often have specialized skills or expertise that the business would otherwise have to outsource for.

Hours and Compensation

Independent workers aren’t subject to minimum wage laws. In fact, many employers instead elect to pay either a flat rate for a project or by word count, if applicable. In many situations, this saves money, as you get exactly what you pay for, not excess or unproductive work hours.

Benefits

As previously mentioned, you don’t have to provide your 1099 employees benefits, including health insurance, and paid time off. However, many companies offer holiday bonuses or other perks or pay a slightly higher rate than they would a regular employee.

Tax Responsibilities

When you hire a 1099 employee, you need to make sure you properly classify them as such. Incorrect classification, intentional or not, can result in tax law violations since companies hiring contractors or freelancers do not deduct their income taxes.

Insurance Coverage

When it comes to workers’ compensation insurance, state laws dictate whether or not employers have to extend coverage to 1099 employees. Beyond what’s legally required, many employers elect to extend other business insurance policies to independent workers to cover their liabilities. For example, including them on your general liability insurance policy can protect your business from paying expenses related to a bodily injury, property damage, or advertising injury claim made against them. You can click here to learn more about insurance for 1099 independent contractors beyond general liability coverage.

Strategic Hiring

Contract and freelance workers can provide a valuable service for your business. They may have the expertise that your in-house staff doesn’t have, or they can fill in the gaps during the busy season or when projects overlap. Before hiring any new employee, you should consider the pros and cons of contracting independent workers and run a financial analysis before making a decision.

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