Should Your LLC Hire an Independent Contractor?
If you have formed an LLC and need to hire staff consider an independent contractor. There are pros and cons you should be aware of before you make your decision.
Although there are many advantages of staffing your LLC with independent contractors, the financial benefits are probably at the top of the list. You may pay an independent contractor more per hour than an employee. However, the overall expense to your business may be less than if you hired employees. If you hire an employee for your limited liability company there are a number of expenses that you pay for employees versus independent contractors.
- Vacation or sick time
- Health Benefits
- Social Security and Medicare taxes, which totals 6.5% of employee’s compensation
- State unemployment compensation insurance, and
- Worker’s compensation insurance
Just the required payments could increase your payroll expenses for employees by 25% or more.
Do you need to expand or shrink staff quickly? Independent contractors can be hired for a specific length of time or for specific projects eliminating lay-offs. When you hire an independent contractor for your LLC you generally hire one with expertise in a specific area reducing training time.
Hiring an independent contractor to staff your business may limit your LLC to legal exposure. Under state and federal laws, employees have a wide range of legal rights that an independent contractor does not such as:
- Protection from discrimination on the basis of race, national origin, color, religion, and gender
- The right to form a union
- The right to be paid minimum wage and if employed in a qualified position, overtime pay, and
- Protection under the Family Medical Leave Act (FMLA) which gives an employee the right to take time off to care for a sick family member or bond with a new child.
by: Blair Woods
For all the pros of hiring an independent contractor you might be tempted to never hire an employee again. There are however some cons of staffing your limited liability company with an independent contractor instead of an employee.
Without a written agreement, you may not have copyright ownership of the work an independent contractor creates. With an employee, in most cases the business automatically owns any work created by an employee.
A number of independent contractors employed by your business may make your limited liability company a target for government audits. Government agencies, especially the IRS get concerned if a company has numerous employees classified as independent contractors. For obvious financial reasons the IRS likes to see employees on your payroll. Employees instead of independent contractors mean more tax and insurance money paid to the government.
Although an independent contractor may be able to hit the ground running you could lose consistency in work by hiring a contractor. If your business requires the same level of work day after day an employee may be the better option for your LLC.