As more and more businesses take advantage of the numerous benefits of using independent contractors (ICs) in lieu of full-time employees, the line between worker classifications can get somewhat blurred. Understanding the difference between the two can be complex, but getting it right can be one of the most important business decisions you’ll ever make.

This is true not only in terms of productivity and your bottom line, but misclassifying your workers can also cost you big-time in penalties, including fines, back taxes, and unpaid benefits. With so much on the line, you need to be extremely diligent when determining which type of worker makes the most sense for your business. 

ICs can provide you with quick help when you need to get a project done right away and don’t have time to go through interviews, training, and HR paperwork. This easy access can be a life saver, especially when you’re just getting your company off the ground and have minimal infrastructure in place.

Though you may pay more per job with a contractor, you aren’t responsible for paying their Social Security, Medicare, or worker’s compensation taxes, nor do you have to offer them benefits like health-care coverage or paid time off. They also have to provide all of their own equipment and office space. Indeed, studies show that you can save an estimated 20% to 40% on total labor costs by using ICs.

Plus, if an IC doesn’t work out, you’re under no obligation to hire them again. Terminating employees can be a much more extensive process, and it’s not always easy or practical to fire someone you’ve spent months training and getting up to speed.

On the other hand, you have minimal control over how ICs perform their work. You can determine the end result of their output, but as long as their work meets the quality and deadline requirements in their contract, they have total independence in choosing how to complete a project.

And since they usually work with more than one client at a time, contractors’ availability may be quite limited—sometimes right when you need them most. Indeed, if they find a better-paying gig, you may discover that they simply don’t return your calls anymore and disappear with no notice or reason, never to be heard from again.

When working with ICs, you must also be careful when documenting their agreements, particularly when it comes to ownership of intellectual property like copyrights. While you typically own all rights to what an employee produces while working for you, unless the IC’s contract stipulates that you own the rights to their work, you might find that you don’t actually own what you’ve paid them for.

Finally, even though you may have worked with someone for years with zero issues, make sure you always have a contract in place for each project. Your business must always come before any personal relationship you may have with the IC, and if they don’t understand that, it’s not worth hiring them.

Utilizing independent contractors can really give your company an edge in today’s thriving mobile economy, but if you’re not careful, ICs can also be a liability. Consult with a trusted advisor for the best advice on the latest worker classification laws in our state and for support in creating airtight independent contractor agreements that protect you and your intellectual property.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.