June 7, 2023, 10:46 p.m.

Costs of an Employee Vs. Independent Contractor

Author: SUBHAZ

Classifying workers is one of the important decisions small business owners must make. It's common for certain company contributors to fall under the "independent contractor" title, including consultants, writers, web designers, search engine experts, secretaries, janitors, machine operators, painters, electricians and other service providers. However, misrepresenting employees as contractors could cost companies big-time, so one must know the definition and the costs of an employee vs. an independent contractor.

Definition
Typically, contractors pay their own benefits and taxes.
The Internal Revenue Service (IRS) looks at three factors to define an employee or an independent contractor: behavioral control, financial control and relationship. Employees are told when, where and how to work. They are given set hours and paid an hourly wage or salary. By contrast, independent contractors work on a project-by-project basis, taking as many hours as they need to complete the task for one set fee. Employees traditionally have most of their tools and financial expenses covered for them by the business, whereas independent contractors may have to purchase their own equipment without reimbursement.rnrnEmployees usually receive benefits that include pensions, health insurance, vacation days and disability insurance, and contractors pay their own way. Independent contractors are also responsible for paying all of their own taxes, as opposed to employees who share the cost with their employers. Generally, employees are hired on a more long-term basis compared with independent contractors.

Employee Costs
Employees cost an average of $29.71 per hour in March 2010.
In April 2010, the Bureau of Labor Statistics estimated that employer costs for employee compensation averaged $29.71 per hour, with wages accounting for 69.6 percent and benefits averaging 30.4 percent of the total employee cost. They found that civilian employer costs, including private industry and government workers, averaged $2.62 per hour for life, health and disability insurance or 8.8 percent of total compensation. Legally mandated benefits, including Social Security, Medicare, unemployment and workers' compensation, totaled $2.30 per hour or 7.7 percent. Benefits that include paid leave, vacation, holiday pay, sick days and personal leave amounted to $2.06 per hour or 6.9 percent. Retirement and savings plans cost employers $1.32 per hour or 4.5 percent. Supplemental pay, such as overtime, shift differentials and bonuses, average 73 cents per hour or 2.5 percent.