Independent Contractors Vs Employees: Payroll and Tax Pros and Cons

Pros and Cons of Hiring Employees vs Contractors

There was a 20 percent increase in the number of UK companies outsourcing to independent contractors in 2017, according to a report by the Information Services Group. In fact, hiring independent contractors has become so common that 35 percent of UK companies outsource IT functions. Many companies cite cost reduction as a major reason why they outsource, with one of the primary benefits concerning tax efficiencies. But do businesses really save money on taxes by hiring independent contractors instead of employees?

Pro: Savings on Taxes and Compulsory Insurance Policies

Hiring independent contractors excuses businesses from the obligation to pay certain taxes and benefits. The employers’ liability insurance, for example, is compulsory for all businesses with employees and it is intended to cover medical expenses, lost wages, disability benefits, and rehabilitation in case an employee gets injured whilst working. Details about eligibility and procedures on how to comply are set out in The Employers’ Liability (Compulsory Insurance) Act of 1969.

The only groups of employers who are exempt from this law are ones that contract out work, own 50 percent or more of the business, or if the company solely employs close relatives. For purposes of determining whether your company qualifies for this policy, make sure that your contractors meet the legal test for independent contractors. For a worker to be classified as an independent contractor, for whom you are not obligated to take out employers’ liability insurance, the following conditions must be met:

  • You don’t deduct National Insurance and income tax from the contractor’s pay
  • You don’t control where and when contractors work
  • You don’t give contractors materials and equipment for work
  • Contractors don’t have a right to the profits your company makes
  • The contractor is allowed to use substitutes to do the work
  • The contractor is not treated the same way as other employees

Pro: Savings on Benefits

Employers can save thousands of pounds each year in terms of perks and benefits on employees by outsourcing. Employers can save money on National Insurance, holiday pay, pensions, and other employee benefits. By choosing to hire independent contractors, you can legally avoid complying with employment laws when it comes to dismissal.

Con: Hidden Costs

To cover the risks associated with not having full-time jobs, contractors typically charge more for the same number of hours than employees would. This means that employers have to be prepared to pay more than they would pay permanent employees. For employers who are exclusively hiring contractors, these added costs are probably more than offset by the savings on taxes, benefits, and payroll management services. But employers who already pay employers’ liability insurance and already employ payroll experts, these added costs may increase their wage bill.

Cost saving is one of the major reasons why companies decide to hire independent contractors instead of employees. However, companies need to be prepared to pay a premium for contract resource which needs to be factored into any business hiring decision.

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