Is it better to be a general contractor or an employee?

This question is often more difficult than you might think. To answer this with accuracy, there are various factors that affect both employment status and how one should act in their relationship as either type of worker or company representative for themselves.

While general contractors and employees can perform the same or similar work, they differ in a myriad of ways. This article looks into the key differences and factors to consider before deciding on being an independent worker or an employee.

Who is a general contractor, and what are the responsibilities?

A general contractor is an independent contractor that hires a subcontractor. This implies that a contractor will maintain his independent contractor status if he carries out the assigned job himself without hiring any other person.

However, once the contractor hires a subcontractor, he becomes a general contractor. As a single employer, he'll be subjected to everything expected from employers under the law.

Independent contractors are not full-time employees. Thus, their responsibilities are usually not on a permanent basis, and their duties depend on the employer's needs. They are self-employed, allowing them to set their work hours and work outside the company premises.

Independent contractors submit invoices when their job is completed, unlike employees that receive remuneration. The major concern of an independent contractor is to deliver what's expected of him and get paid.

Who is an employee in construction?

A full-time employee works under a business or company. Such an employee is subjected to the company's regulations, and there's no liberty of making decisions on your own. Unlike self-employed individuals, an employee is entitled to various company benefits, including workers' compensation, health insurance, pension plan, vacation pay, overtime pay, etc.

Employees work on-site and only perform the duties associated with their job offer. They are sometimes compelled to undergo special training to improve their performance on the job. Human resources operations directly affect employees. HR usually oversees employees' work and sees that they're duly compensated through the employer's payroll system.

Contributions for income tax, social security, medicare tax, employment taxes, and benefits, etc., are usually deducted from wages paid to employees. This ensures they don't have to pay these taxes once they receive their wages.

Which one is right for you?

As an individual looking to choose a career path, what you should consider are the pros and cons associated with both options.

Being an independent contractor comes with its perks and shortcomings. The pros include:

• Independent contractors have the liberty to call your shots, i.e., you're responsible for your success and failure.
• Flexible work hours and workplace
• An independent contractor works with more freedom compared to employees.
• Eligibility to deduct business expenses from income tax
• Ability to retain rights on intellectual property
• No upper limits to gain.

The cons are:

• Higher self employment tax burden.
• No company's benefits — life, health, disability, or retirement.
• More expenses than employees
• Solitude and loneliness
• Earnings may be dependent on the company's budget planning.

On the other hand, some individuals love the idea of being an employee, but for others, it can have drawbacks.

The pros of being an employee are:

• Employees are eligible for the company's benefits
• They spend less on running expenses compared to independent contractors
• They only have to pay part of FICA and Medicare taxes
• Eligibility to receive salary + possible bonuses
• Ability to collaborate with teams to make work faster and seamless.

The cons include:

• Limited career opportunities
• Workplace politics
• Lack of freedom, i.e., you must work at the employer's place, except if permitted to do otherwise.
• Fixed work hours
• Employees will probably assign their intellectual properties to employers while still under employment.

To determine which is right for you, you must consider the pros and cons to weigh your options before deciding. As an employee, there's a constant need to follow business news daily, stay updated about the latest business technology, and show up even when the conditions aren't all that favorable.

While independent contractors have to be constantly self-motivated due to a lack of team or support, as an independent contractor, you can decide to hire a subcontractor and become a general contractor.

Employee or An Independent Contractor: Who to hire and things you should know

Contractors and employees can benefit a company in many ways, but there are essential factors small business owners must consider before knowing who to hire between an independent contractor and an employee. Employers must consider the pros and cons of hiring either of the two workers and understand in-depth how internal revenue service (IRS) and state tax authorities define workers' status to prevent worker misclassification and its implications.

Your business expenses are much higher when hiring an employee than an independent contractor. This is because your company owes payroll taxes on their wages, including insurance policies and other company benefits. However, beyond the expenses, you may need to consider other factors like business stability, frequency of the job, and the importance of the job to your business. Hiring an employee usually brings about more stability, and it's more advisable if the job need is permanent and it forms a core part of your business.

How IRS Defines Independent Contractors and employees

Employment status is an essential concept for tax purposes. It's important to pay taxes as your taxpayer identification number comes in handy in different ways. Usually, your business or company isn't meant to pay any employment tax or other taxes on an independent contractor. However, a lack of understanding of how the IRS defines an employee or an independent contractor can make your company pay for it and even face penalties.

Government authorities consider three things when evaluating an individual's independent contractor's status. These factors make up the important legal differences between a contractor and an employee. They are:

• Employer degree of control (control test)
• Contractor-employer relationship
• Economic realities involved (Business aspects)

1. Control

The IRS believes your degree of control over a contractor is a vital determinant of tax status. Control could be behavioral or financial. The first involves dictating how the contractor must carry out the job, while financial control involves reimbursement of the independent contractor's expenses, paying for used equipment, and restricting the ability to enter into another contract with other clients. If any of these occurs, the contractor is classified as an employee, and you must pay the necessary employment tax.

2. Business Relationship

IRS authority considers how an employer works together with an independent contractor. Is there a written contract? Does the relationship continue after the job? Does the company give the contractor sick pay, pension, or insurance benefits? Etc. If any of the answers to these questions is 'Yes,' the IRS will most likely classify the company's contractor as an employee. Open-ended workers are usually considered employees as well.

3. Economic Realities

The IRS considers this a key aspect of classifying the person performing your job as an independent contractor or an employee. The criteria for determining this may include the pertinence of the job to your business, the individual's control over the work profitability, and the level of the individual's skills and initiative.

To avoid misclassification of an employee or independent contractor, your company must seek IRS guidance and ask them to determine your contractor's status by filing the form SS-8. You can also leverage consulting services from a tax attorney.

It's vital to also consider the insurance implications of hiring either an employee or an independent contractor for your business. Your insurance policy covers your employees, but you're not financially liable for any claim involving an independent contractor with his policy. Thus, always request a certificate of liability insurance when hiring independent contractors.