How Using Contractors Can Benefit Your Company

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Benefits of Using Independent Contractors

As technology changes, enabling an ever-increasing number of people to work off-site, the use of independent contractors is growing. As in any business decision, the decision to use independent contractors comes with many considerations. Let’s look at the primary benefits of using independent contractors.

  • Cost savings.  Even though the hourly rate for independent contractors is often greater than that for employees, there are substantial cost savings that usually more than offset this difference. For example:
    • Wages paid to independent contractors can be deducted from your taxable income. *Of course, you should consult with your tax and accounting professional.
      Substantial savings may result from not providing benefits (e.g., health insurance, retirement contributions etc.). There are also no costs associated with workers’ compensation insurance or unemployment insurance for these individuals.
    • Savings may also be seen as a result of simplified payroll administration.  Since the employer is not responsible for withholding payroll taxes for the independent contractor (having been appropriately classified), and there is no application of benefits, payroll administration becomes a less complicated and less time-consuming task.
    • Lower recruiting costs.
    • Independent contractors typically do not get any type of paid days off, which is both a direct and indirect savings to the employer because it also translates to less loss of productivity.
  • Flexibility. Independent contractors can be brought on as needed—and, accordingly, when the project is complete, the independent contractor moves on. There is no need to fire someone when workloads change.
  • Access to specialized skill sets. There may be specific skills the organization needs to tap into to accomplish its goals—skills that are not part of the normal employee skill set in that organization. Finding independent contractors with these specialized skills can be a way to access the necessary skills and experience without the need to hire someone full-time for a role that might not warrant a full-time/permanent position.
  • Reduction of lag time between hiring and full productivity.  Independent contractors often have specialized skills and require far less training (if any), allowing the employer to get more accomplished faster.
  • Reduced legal risks. Another benefit here comes from the fact that these individuals are not being hired and fired in the traditional sense. By default, this lessens the risk of unlawful termination and similar lawsuits. Independent contractors are also exempt from many wage and hour and antidiscrimination laws.

*This article does not constitute legal advice. Always consult legal counsel with specific questions.

The True Cost of Employees vs Contractors: Example

There are three primary categories that inflate an employee’s base costs beyond their salary.

  • Fringe benefits. Items such as health care, retirement contributions, paid time off, workman’s compensation, and so on.
  • Overhead. Business expenses not attributable to a specific project. Examples include rent, computer equipment, office supplies, voice and data communication charges, hosting services, and so on.
  • General & Administrative (G&A). Expenses attributable to running your business in general, such as salaries for corporate executives and administrative personnel, legal fees, accounting fees, and so on.

According to a recent Deltek report, the most common values for these rates are roughly as follows: Fringe 35%, Overhead 25%, G&A 18%. This represents a median figure of roughly 1.99, with a range of the multiplier being 1.5 to 2.5.

Standard Employee (based on 2080 hours)

MultiplierBase HourlyLoaded Hourly CostsAnnual (2080 Hours)
1.5$45$67.5$140,000
1.9$45$85.5$177,840
2.5$45$112$232,960

Contractor (also uses company infrastructure but at a lower rate and is not paid for holidays – 80 hours and no vacation time – 80 hours. Based on 1920 hours)

MultiplierBase Hourly (example only)Loaded HourlyAnnual (1920 Hours)
1.18$70$82.60$158,592***

Hopefully this document helps to clarify the likely costs of employees versus contractors. Clearly the case for professional services is valid and compelling when considering all of the benefits.

Call OmniaOne for more information – 404-333-4544


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