According to a recent survey, out of 200,000 SMBs, 90% choose to hire independent contractors or remote workers instead of traditional employees, and 33% claim that their business success depends on contract employees. This is not surprising. Contract workers help business owners reduce costs while providing similar, if not better, quality work than employees.
However, the question arises: Should these non-traditional workers receive the same benefits as employees?
Offering benefits can improve the morale and loyalty of your workers, resulting in increased productivity and better work quality. They can also be a smart strategy to attract top talent.
In this article, we will dive deeper into the differences between an employee and a contract employee and explore why you should also consider offering contract employees benefits. By the end, you will better understand whether to provide contractor employee benefits and which ones to offer.
Bonus Resource: What is Nearshore Outsourcing? Everything you need to know
What Is the Difference Between an Independent Contractor and an Employee?
The major difference between an employee and an independent contractor is the nature of the employment relationship and how the worker is paid and the tax liabilities that may or may not be incurred. While employees are subject to more control from their employer and have access to benefits the employer offers, independent contractors have more autonomy over their work and are responsible for reporting their earnings to the IRS and submitting taxes due.
Let’s have a more granular look at each type of worker.
Independent contractor
An independent contractor is a professional who offers their goods or services to another person or company on a contractual basis. Unlike employees, they are not considered part of the client’s staff but operate as self-employed individuals.
The contract between them and the client usually outlines the terms of the work that will be done (which may be on a project basis), including the agreed payment, deliverables, and timelines. Once the work is complete, the collaboration between independent contractors and the client typically ends, although the contractor may be hired again for future projects.
Unlike employees, independent contractors are responsible for reporting their earnings, and the employer does not withhold their tax payments from their wages. They are also not covered by most employment and labor laws, including minimum wage and overtime laws (Fair Labor Standards Act), unemployment insurance, and workers’ compensation insurance, among others. Contract workers are also not entitled to fringe benefits, such as health insurance benefits, paid time off or retirement plans.
Employee
An employee, commonly referred to as a W-2 employee (based on the W-2 tax form they receive annually), is a worker hired directly by a company or organization and is covered by federal and state employment and labor laws.
They typically work under the direction and control of their employer and are subject to the employer’s policies and procedures.
Employees may work full-time or part-time and may be eligible for benefits their employer offers, such as health insurance, retirement plans, and paid time off. Employers, in turn, are required to withhold their taxes (Medicare, Social Security Tax, federal income tax) and report their income to the IRS. Employers also must provide or pay for their share of contributions for these statutory benefits:
- Social Security and Medicare contributions
- Workers’ compensation insurance
- Family and Medical Leave Act (FMLA) protections
- Health insurance under the Affordable Care Act (ACA)
- Unemployment insurance coverage
If you want to know how to classify your employees properly, check these IRS guidelines.
For things to remember when hiring an independent contractor, see our handy downloadable independent contractor hiring checklist.
Do Independent Contractors Get Employee Benefits?
Typically, independent contractors should not be given employee benefits, or you may run into an independent contractor misclassification case.
That being said, it’s not illegal to offer benefits to contract workers. In fact, there are certain advantages to doing so (better contractor experience and retention), provided that the nature of the working relationship is carefully evaluated.
Why Should Employers Offer Benefits to Remote Independent Contractors?
Employers should consider offering benefits to remote independent contractors for several reasons. We elaborate on three of the most important ones below:
1. Helps attract high-quality talent
When companies offer benefits, they differentiate themselves from rival companies that do not provide similar perks. It also demonstrates a commitment to supporting workers’ well-being and providing a positive and more secure work environment, making the job offer more attractive. It can help entice highly skilled talent to work for you.
2. Improves retention
It is not a secret that turnover is costly, even when it comes to independent contractors. Workers are more likely to stay with a company if they feel valued and supported, and benefits can go a long way toward improving retention. If you choose to offer contractors benefits, they may be more likely to stay with the company long-term, which leads to saving costs on recruiting and training new contractors.
3. Makes remote team members feel valued
There are various reasons you may need to hire someone as an independent contractor rather than as a direct hire. For example, hiring a remote foreign worker as an independent contractor is a way to make hiring from abroad easy—it doesn’t mean you don’t see them in the same way as a direct hire. But they may feel disconnected from the company if they are not treated like regular employees.
Benefits can solve this challenge. They show that the company cares about its contractors’ well-being and recognizes the important role they play in the organization. Even though they are remote or contract workers, these benefits will help them feel like a valued part of the team.
What Kind of Benefits Should Employers Offer to Remote Independent Contractors?
The contractor employee benefits will depend on the company’s budget and priorities, but anything that can help with productivity, performance, and overall employee satisfaction is a good idea. Here are some possible benefits to offer:
Equipment reimbursements
Independent contractors working remotely need a home office setup. As such, you can reimburse them for the equipment they need to buy, such as a laptop, desk, chair, mouse, headset, or other necessary items.
Health insurance
You can provide healthcare benefits to independent contractors by including them in a group health insurance plan (if you have enough employees to be eligible) or through an agreement with third-party healthcare providers. There are various options available, including private health insurance plans, health savings accounts (HSAs), and flexible spending accounts (FSAs).
If the independent contractor works from another country, you can give them a stipend to pay for healthcare in their country.
Holiday bonus
Providing holiday benefits or bonuses to independent contractors can be a great way to show appreciation for their hard work and dedication. This benefit can be particularly attractive to contractors from countries where holiday bonuses are common, such as in Latin America, where they receive an aguinaldo—the equivalent of a 13th-month salary.
Companies can also consider offering a birthday bonus as an additional way to show their appreciation. This can be a small bonus payment or a gift card to their favorite online store (e.g., an Amazon gift card).
Gym membership
Offering gym membership or fitness reimbursements to independent contractors can be a great way to promote their physical health and wellness.
In terms of US law, the IRS allows employers to reimburse employees, including independent contractors, for fitness-related expenses up to a certain amount per year without the reimbursement being considered taxable income. Just make sure to have a clear policy in place regarding gym membership reimbursements that outlines the eligibility criteria, reimbursement limits, and any other relevant terms and conditions. Properly document and track payments to avoid any potential tax or legal issues.
Bonus resource: Want to know how to provide the right compensation package for your remote contract workers? We discuss “5 Compensation Strategies for Remote Workers” here.
Independent Contractor Benefits Are a Winning Strategy
Although around 51% of independent contractors don’t receive benefits, doing so is a win-win strategy. Companies can build a more positive and supportive work environment, attract and retain top talent, increase job satisfaction, and gain a competitive advantage in the marketplace. And your independent contractors can save money on healthcare or equipment costs and feel more valued and appreciated, which makes you an attractive choice that stands out from the competition.
But then again, to avoid blurring the line between employee and independent contractor classification, you must evaluate the nature of the employment relationship and ensure you are legally compliant with your local labor laws. Before offering benefits to your independent contractors, you may want to seek legal advice or work with a trusted hiring partner like Near, especially when it comes to hiring from abroad.
If you are looking to scale your team with independent contractors from Latin America and take advantage of the benefits of nearshoring, Near can help you find the top talent you need. Our services include pre-screening candidates, employee onboarding, and providing benefits and perks.
Start building a successful remote team that will help you achieve your business objectives today! To see how we can help you and to get a list of pre-vetted candidates you can interview for free, book a complimentary consultation call.
