An Overview of the Advantages or Disadvantages of Hiring an Employee versus an Independent Contractor

If your business is expanding and you need to hire help, then you have a good problem!  Your next decision should be whether you should hire your new workers as employees or independent contractors.

Generally, bringing on new workers as employees is more expensive and time consuming for the employer; and bringing workers on as independent contractors is easier but poses some risks for your business.

One of the first things you should know is that regardless of whether you hire someone as an employee or independent contractor, the courts in Ohio and the IRS will look at how they are treated rather than what the paperwork says in coming to their own determination of whether the worker is an employee or independent contractor.  The IRS uses the following test, and you should also use this test in order to determine whether it makes sense for you to hire workers as employees or independent contractors.

The attorneys at Harris & Engler can help your business with its employment and expansion issues.  The law firm of Harris & Engler is located in Columbus Ohio, and its attorneys help businesses get properly set up for expansion, whether through hiring independent contractors or employees.  Call an attorney at Harris & Engler today by calling (614) 610-9988.

How to Choose Between Hiring an Employee or Independent Contractor

  1. Behavioral Control
    • Will you direct and control how the work is done?
  2. Financial Control
    • Are the business aspects of the worker's job controlled by the employer?  (including things like how the worker is paid (weekly v. completion of job), whether expenses are reimbursed, who provides the tools/supplies, etc.)
  3. Type of Relationship
    • Are there written contracts or employee-type benefits?  Will the relationship continue and is the work performed a key aspect of the business?
Yes answers to the above questions all indicate that the worker is an employee.  The law in Ohio focuses on what is actually happening in the relationship between the employer and employee or independent contractor - even if a worker is designated as an Independent Contractor on paper.

The Risk of Bringing Workers on As Independent Contractors

If you bring on new workers as independent contractors, you essentially cannot tell them how to do the work (no quality control), because then it would make them appear as employees under the law, and then if they're employees then you should be paying withholding taxes.

With independent contractors, the big risk, depending on the industry, is that the contractor would steal any new business opportunities for themselves, which they are entitled to do.  With employees, you can have them sign non-compete agreements, with independent contractors you generally cannot.

The Costs of Hiring Employees

The costs are certainly going to be greater in hiring employees rather than independent contractors, but in many circumstances it is well worth it.

You should generally hire as an independent contractor if you need help with completing certain jobs and do not foresee the relationship lasting beyond that.  With employees, you need to be able to guarantee them a minimum number of hours to work per week.  Employees will also generally expect benefits such as health care, vacation and sick time.  

There are also numerous State registration and insurance requirements that you must abide by in order to bring on new employees.  You can read about these requirements here.  

If Your Business is Ready to Expand, and You Need Help Navigating the Laws in Ohio, Contact Harris & Engler

The attorneys at Harris & Engler are here to guide you through the process of getting set up to hire employees or comply with the tax reporting requirements of independent contractors.  Contact an attorney by calling (614) 610-9988.



An Overview on Business Entity Selection in Ohio

The requirements for formation of a Corporation mirror those of forming a LLC in Ohio.  This begs the question of should you form a LLC or a Corporation?

For most business owners, it is almost always smarter to form a LLC.  This is because the LLC is so flexible and can be structured as a corporation, a partnership, or a mix between the two.  Business owners can usually accomplish their goals with a LLC shell.

When it is More Advantageous to Form a Corporation in Ohio

It is more advantageous to form a corporation in certain circumstances.  Mostly those circumstances include when the business is expected to become a big business, take on investors, and sell stock.

The reason that it usually only makes sense to form a LLC rather than a Corporation is for tax reasons.  LLCs and Corporations can elect to be taxed as a S Corporation (pass through taxation) if they have under a certain threshold of shareholders (100, as of 2015).  If the company has above the requisite number of shareholders, then the business must be taxed as a C Corporation and incur double taxation (the company is taxed on income and the shareholders are taxed on divident income).  

If the company will likely grow to over 100 shareholders, the Corporation entity is the most well suited.  There are other tax implications that may tip the scales in favor of forming a Corporation over a LLC.  These include taking on foreign investors, using multiple classes of stock, maximizing medical tax deductions, and minimizing employment taxes.

Family Businesses in Ohio

The other area where it may be more advantageous to form a corporation rather than a LLC is for family owned businesses.  Forming a "closely held corporation" has been the entity of choice for successful family businesses.  You can read more about closely held corporations here.  

Columbus Ohio Corporate Attorneys

If you have been operating a business and are contemplating a change in structure, or you want to form a business that is set up for success, contact an attorney at Harris & Engler by calling (614) 610-9988.
Columbus Business Law Firm

Disclaimer:  Harris & Engler offers this website and the content on it for informational purposes only, as a service for our clients and friends.  The contents of this site are not considered legal advice for any purpose, and you should not consider them as such advice or as legal opinion on any matters. 

With Offices Located at: 30 Northwoods Blvd., Suite 350, Columbus, Ohio 43235
Phone: (614) 610-9988  Email: contactus@harrisengler.com