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ADVANTAGES OF INDEPENDENT CONTRACTORS
As mentioned above, main advantage of independent contractors versus employees is cost. You can get same or better service from independent contractors for a lower hourly rate than you can from employees because you don't have to incur all add-on expenses that go along with hiring employees.
=> Equipment and Materials
In addition, you don't have to provide office space or materials and equipment to independent contractors. As independent contractors (who may also go by terms "freelancers", "consultants", "self-employed", "business owners" etc.) are self-employed business people, they have their own "tools of trade". If they're website designers, they have their own office space, computer and printing equipment. If they're gardeners, they have their own lawn mower, whipper-snipper, wheelbarrow and pruning shears.
=> Legal Liability
At law, an employer is vicariously liable for torts of his or her employees. This means that if you hire an employee gardener who accidentally runs over your customer's pet cat in driveway of her home when customer had made it clear that your employees are always to park in street, in addition to suing your employee for negligence, she can also sue you, employer, as you are vicariously responsible for acts of your employees. (And, by way, this applies whenever your employee is acting within scope of employment, whether under your express instruction or not. If your employee has a car accident when traveling between jobs and his negligence at least partially caused accident, you're responsible to same extent as employee.)
This is generally not case with an independent contractor unless independent contractor has been engaged to perform an inherently dangerous activity (such as blasting) or you have attempted to delegate to your independent contractor a non-delegable duty (such as keeping a rental property you own in good repair for benefit of tenant).
In addition to minimizing legal liability for torts, hiring independent contractors also minimizes your liability for other types of lawsuits such as wrongful termination or job discrimination.
DISADVANTAGES OF INDEPENDENT CONTRACTORS
There are two main disadvantages to hiring independent contractors versus employees.
Far and away most serious disadvantage is if you misclassify employees as independent contractors. Merely labeling a worker as an independent contractor is not enough. They must actually be an independent contractor.
If you do misclassify an employee as an independent contractor, you must pay IRS all back-taxes owed, plus interest, plus penalty (12% - 35% of total tax bill).
Also, you expose yourself to an increased risk of state audits when your terminated independent contractor files for unemployment benefits. Never mind that you and your independent contractor intended that there be no employer/employee relationship, many's disgruntled independent contractor who unilaterally decides to recategorize relationship as one of employer/employee when spectre of unemployment benefits raises its pretty head. In such situations, you'd better be able to protect yourself by proving that arrangement was for an independent contractor and not an employee.
=> Legal Liability
Unlike an employee who is limited to workers' compensation benefits, an independent contractor can sue you for negligence if they're injured on job. That's what liability insurance is for though.
Elena Fawkner is editor of A Home-Based Business Online ... practical home business ideas for the work-from-home entrepreneur. http://www.ahbbo.com