These days, more and more businesses are making greater use of the independent contractor. There are many scenarios in which using independent contractors makes sense. However, every company and contractor needs to understand its benefits and costs.
Even in this day and age, not every business owner is fully aware of the differences between payroll employees and independent contractors. There are pros and cons to using one over the other, and this often varies depending on the nature of your business. Experts at The Goodkind Group are familiar with the pros and cons of each, including whether or not it makes sense for your business to offer benefits to your independent contractors.
What is the Difference Between Payroll and Independent Contractor Employees?
In human resources lingo, payroll employees are those employees tax classified as W2 employees. These are employees working 100% for the company that hires them. But, not all payroll employees are afforded the same level of benefits. For example, part-time hourly payroll employees do not necessarily receive benefits as do salaried, full-time payroll employees.
Employers are permitted to demand more from W2 payroll employees with regard to hours and workplace demeanor. Companies that require employees to follow a handbook and report to the office during certain hours will usually hire payroll employees.
In contrast, independent contractors are tax classified as 1099 employees. Technically, they are not employees but instead self-employed workers hired for a project or time period. In some industries, they are known as freelancers or subcontractors. Employers hire independent contractors with an agreement over what the deliverables are and the parameters within which those deliverables will be completed.
Employers may not require certain work hours, dress codes, etc. from their independent contractors. For the most part, independent contractors can choose whatever work schedule they prefer so long as they complete the work within the assigned timeframe and according to the parameters discussed.
Pros of Offering Benefits to Independent Contractors
It is not necessary that employers offer their independent contractors benefits (such as health insurance) as they would to their payroll employees. In fact, most companies that hire independent contractors do not offer benefits. That being said, there is a small portion of companies that do offer their independent contractors health benefits. Recruiters at The Goodkind Group can assist you with understanding the pros of offering benefits to your independent contractors. Here are a couple of the main reasons why.
As a disclaimer, offering independent contractors benefits is not the same as withholding taxes on paychecks or contract payments. It is still the responsibility of self-employed individuals to withhold and pay quarterly taxes when necessary according to federal (IRS) and state requirements.
Keep the Best Freelancers and Subcontractors Happy and Loyal
In some industries, finding and keeping talent–even freelance talent–can be difficult. As such, companies may not always be able to offer the most money, but it may be within their ability to offer their independent contractors health insurance.
This is a big deal for self-employed individuals. It is very difficult to find a quality, affordable family healthcare plan when self-employed. Independent contractors may be willing to forego the highest paycheck if one of their clients offers them health benefits.
More Employees on a Health Plan Might Mean Better Rates
For some companies, having a larger workforce that they can offer health benefits to actually decreases benefits costs for everyone. If your company already hires a number of people as payroll employees, you could decrease your per-employee benefits cost by including your independent contractors.
Cons of Offering Benefits to Independent Contractors
Overall, most companies choose to not offer benefits to their independent contractors because it generally increases overall costs. It can make a company’s payroll more complicated, and there are also tax implications for both employees and independent contractors. That’s why offering benefits to independent contractors is not for everyone.
More Operating Expense
While in many cases, the cost per employee may decrease, overall operating costs still increase by adding independent contractors to company benefits. If talent is fairly easy to come by in your industry, it may not be in your best interest to include independent contractors in your company benefits packages.
Not All Group Carriers Allow Multiple Employer Welfare Arrangements (MEWAs)
Not every group plan will allow you to mix payroll employees and independent contractors. If you are interested in offering independent contractors health benefits, it is important that you discuss your intentions with your payroll provider and benefits provider. It could mean that you need to change providers entirely, or you may be looking at a more complicated scenario to work through come tax time.
For more information about how The Goodkind Group can help your company maximize the use of independent contractors, contact a consultant today at (212) 378-0700 or visit our website.