Small business owners are increasingly relying on the services of independent contractors as an integral part of their business. According to new research by Paychex, Inc., the growth rate of independent contractors peaked in August 2017 at 11% year-over-year, and while the growth has slowed since then (5% in August 2018), it far outpaces the growth rate for employee hiring among small businesses, which has been at less than 1% since 2013 for businesses with 1-49 employees and at least one independent contractor.
According to the IRS, generally, a worker is classified as an independent contractor for tax purposes if the payer (or business) has the right to control or direct only the result of the work and not what will be done and how it will be done. As such, the earnings of a person who is working as an independent contractor are subject to self-employment tax.
Key Findings from Research
Among small businesses that utilize independent contractors, the data shows that the rate of growth for independent contractors has been faster than employees for the past 5 years. Broken down by business size, gender, geography, and industry, data highlights include:
Business size. Businesses with one to four employees utilize the most independent contractors (6.7 per employer).
Gender. There is a slightly higher percentage of male independent contractors (51% nationally), but the percentage of female independent contractors is on the rise, increasing 1.5% during the past 5 years.
Region. The South has the highest percentage of small businesses with independent contract workers among regions (38%) and the Northeast has the lowest percentage (26%).
State. In Texas, total worker growth slowed at businesses that utilize independent contractors from the middle of 2016 through 2017. When it increased once again, it was led by independent contractor growth, which averaged 33% of total workers in 2016 through 2017, and 37% in 2018.
Metro. Independent contractors have driven worker growth in Miami, especially during the past 5 years. Among small businesses that utilize independent contractors in Miami, independent contractors make up 47% of total workers, compared to a national average of 36%.
Industry sector. Trade, transportation, and utilities use the most independent contractors among industries, while Manufacturing uses the fewest.
Independent Contractors Are Great for Specific Projects
Employers today are discovering that there can be a lot of benefits to utilizing independent workers. Even with higher per-hour costs, independent contractors often save companies money because they cost less in other ways. For example, these workers aren’t paid benefits, there are less administrative requirements (no I-9 forms, no other paperwork), they aren’t covered by workers’ compensation insurance or unemployment insurance, and training costs are usually either unnecessary or minimal.
Hiring an independent contractor can be a way to fill a temporary need without having to later fire or lay off workers when the project ends. This means the employer can more easily plan around surges in demand, seasonal needs, or short-term projects.
Furthermore, using independent contractors can occasionally act as a long-term job tryout of sorts, with minimal risk to the employer; if you like the contractor, you could offer regular employment later. Utilizing contract workers can be an easy way to fill in for long-term absences of full-time employees.
Independent contractors may come with specialized skill sets that are difficult to find; hiring them could allow the organization to fill a specialized need. For Larry Davenport of MIT Group, Inc.in Oklahoma City, engaging the services of independent contractors has had its benefits.
“We use independent IT contractors when possible, as they typically have the skill sets and the industry expertise we need to fulfill our projects … Our projects are short-term and unless there are follow-on projects using the same skill sets, they (employees) sit on the bench and draw income from the company, which could be better spent elsewhere,” says Davenport.
As the use of independent contractors increases across the country, states (including California, Illinois, and New Jersey) and courts are actively examining worker classification definitions, with the aim of advancing potentially greater worker protections.
How to Recruit Independent Contractors
If you’re a small business and are unsure of where to begin finding independent contractors for your company, there are several ways you can go about finding independent contractors. Here are some examples:
- Utilize an agency that specializes in placing temporary, independent workers. In this scenario, the individual is often an employee of the temp agency, and that agency bears the associated costs and only charges you a set fee. The advantage to this method is that the agency does the work of vetting the individual and determining his or her skill set. The disadvantage is that there is typically an agency fee (on top of the contractor’s wage) that must be paid.
- Utilize online job boards that specialize in bringing employers and independent contractors together. On some of these job boards, the employer places a post describing their business needs, and then multiple independent contractors place bids (along with descriptions of how they would perform the job and evidence of their qualifications). This allows you to personally select the contractor from the bids/proposals received and to vet their qualifications.
- Utilize your existing professional network to find contractors. This might mean asking others in your network who they’ve used in the past. Or it might mean using your social media network to source someone. It could also mean asking your team of managers and even employees for recommendations on someone to hire—they may very well already have someone in mind who is available for contract work.
- Post your job directly. This method can be a little less straightforward than it sounds, but only because you probably won’t be using the same job boards you would for hiring a regular employee. Contractors realize that most jobs on the regular job boards are not what they’re looking for—thus, you may not have many takers when posting there. Instead, focus on posting in places that cater to all types of jobseekers, such as university career centers or more generic online classified sites.
- Notwithstanding the last point, you could opt to post on traditional job boards as well. While many independent contractors avoid traditional job boards simply because they have to wade through a lot of work they’re not interested in, that doesn’t mean that this method is completely off limits. Just be honest about the offerings up front, and you may find that some traditional jobseekers are willing to take the plunge and become an independent contractor. Or you may find one of the contractors who also scours traditional job listings.