Contract Labor: Pros + Cons of Independent Contractors

A few months ago, the U.S. unemployment rate was 3.6%. There was a healthy market for freelancers, part-time workers, full-time employees, and everyone in between.

Now? It’s a different story. Unemployment claims have risen to a high unseen since the Great Recession, or Depression, depending what economic policies you follow. Businesses are furloughing workers left and right. Also among those who have suffered from the fallout of this pandemic are the freelancers and independent contractors that drove the gig economy.

As businesses are kind of opening back up, it’s worth taking another look at how businesses can ramp up their workforce to match demand. With things this unstable, we thought it would be helpful to look at responsive hiring solutions: contract labor and temporary employees.

What is Contract Labor?

Contract labor is the use of independent contractors—1099 independent contractors—rather than direct employees—W-2 employees. In 2018, the Labor Department stated that one in ten workers is an independent contractor.

Independent contractor status extends from law principles and tax implications that focus on compensation. Independent contractors work under a specific contract that they and the hiring company have agreed upon. The contract specifies a job to be completed. The independent contractor invoices for work completed. The company has less control over an independent contractor—including working hours and work production—than over a traditional employee. 

Other signifying hallmarks of an independent contractor include:  

  • The worker is provided a 1099-MISC tax form rather than a W-2 and is expected to take out their own taxes
  • A lack of employer-paid benefits, such as health insurance, Social Security, Medicare, worker’s compensation, state unemployment, FMLA leave, etc.
  • A lack of employer-supplied working materials (the worker supplies their own equipment, materials, or tools)
  • A lack of employer control over the work day (the worker can negotiate or control the hours they come into the office if they come in at all)
  • The worker submits invoices for projects/hours completed 

Depending on short-term and long-term business goals, hiring contract labor can be the smart move, but there are things to consider if you’re a manager who’s in a position to hire. 

In the short-term, bringing on workers on a full-time basis might not make sense; contract labor might be the route to go as your company tests the waters of what “normal” feels like. Hiring workers long-term on a contract basis doesn’t create loyalty. As a business owner, the ability to position yourself to accommodate what’s down the line as requirements change.

What you need is the flexibility and other benefits of a contract labor solution—without the risks. That’s where we come in.

Adia is the on-demand staffing platform that streamlines your workforce planning. Instead of hiring contractors and negotiating pay and availability, let our technology match qualified, vetted workers to your terms. 

Our worker pool is more substantial because it’s a community rather than a Rolodex. 

Interested in learning more? Feel free to skip to how we’re a better solution for your workforce needs than contract labor and traditional staffing agencies. 

If you want to know more about contract labor, the tax implications, and more in-depth advantages and disadvantages, read on. 

Contract Labor and Business Taxes 

One of the main reasons contract labor is used over hiring a full-time employee is cost savings. By hiring independent contractors, you won’t need to pay:

  • Insurance 
  • Benefits 
  • Social Security
  • Medicare
  • Workers’ compensation
  • State unemployment taxes

Because an independent contractor is self-employed, they’re not covered under most federal employment laws. As a self-employed contractor, they’re subject to self-employment tax.

PRO TIP: If these workers are on a 1099-MISC, wages paid can be deducted from taxable income. You need to provide the IRS Form-1096, and all should be accounted for, but it’s also essential to check with your tax professional to make sure this works with write-offs. 

It’s worth checking with your tax professional to ensure that you’ve followed the specific procedures and filled out the appropriate forms to ensure that you aren’t putting yourself in the position of needing to deal with an IRS audit. Misclassifying workers is one of those red flags that can also trigger an IRS phone call.

Difference Between 1099 Vs. W2

It’s essential to understand the differences between tax forms – especially the W-2 and 1099. Making sure you’re aware of these two forms’ nuances can be a make-or-break situation come tax time. Both of these forms are information wage statements, but they classify workers differently. 

  • Form W-2 is a wage and tax statement, which is specifically for full-time, paid employees.
  • Form 1099-MISC is for income paid to non-employees – contractors and freelancers.

Learn more about the difference between a 1099 and a W2. 

Main Benefits of Contract Labor

Contract labor enables flexibility when looking for workers to meet specific needs. These benefits can accrue to both smaller companies as well as big players who maintain the distinction between their full-time employees and the contract workers they hire.

The benefits include:

  • Save up to 30% on traditional payroll expenses 
  • Additional control over the size of your workforce — expand or scale back as needed
  • Minimal obligation—after the terms of the contract are met, there are no hard feelings or expectations not met when it’s time to part ways.
  • Fewer legal requirements—pandemic-driven benefits aside, independent contractors aren’t traditionally protected by as many state and federal laws (minimum wage, overtime, sick leave, etc.) 
  • Customize your workforce as needed—no need to spend additional time and money training and developing talent when you can outsource the specialized work to a contractor with the expertise

Main Disadvantages of Contract Labor

While there are a few advantages of contract labor, they’re outweighed by the disadvantages. 

These include:

  • Less control over workers and their output—workers are independent
  • Turnover is high because there’s less incentive to stay and no reason for company loyalty
  • Possible liability—minimal obligation doesn’t mean no obligation if someone is seriously injured on the job 
  • Increased scrutiny—worker misclassification ensures the IRS has incentive to audit 

Independent Contractors Versus Temporary Hires

What we do at Adia is significantly different than other staffing agencies or platforms. 

The game-changer? We’re a digital on-demand staffing platform with a community of temporary workers that we hire as W-2 employees. That means less paperwork, and you get to write off Adia as a business expense. When you hire our workers, we take care of the red tape.

Hire Temp Employees With Adia – On Demand Staffing Platform

Adia is different from other workforce labor solutions because we’re an on-demand staffing platform more agile than any traditional staffing or temp agency. We can pivot as the market demands, which is also true for the community we’ve built. Our model is simple: we take on all of the hiring risk. It was always this way, pre, and post-pandemic. 

What things set Adia apart? 

  • Our community of workers are W-2 employees.
  • We withhold taxes.
  • We take care benefits.
  • We’re on the hook for liability.

This enables you to:

  • Maximize efficiency by setting the hours and the pay and letting us handle the rest
  • Minimize overhead by writing off Adia as a business expense

If you’re seeing business pick up or have projects that need to be taken care of in a realistic timeframe, Adia can help.

Our community of workers is a pool of qualified, vetted candidates with a variety of skill sets. We helped some of the biggest retailers survive the crush of customers during the first wave of COVID-19, we staffed Soldier Field for the Rolling Stones, and we can help your team navigate the challenges of tomorrow’s business. The best part is you’re in complete control of the pay scale, the time frame, and how many people you’ll need. 

Sound good? Let’s get to work.

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