Costs of an Employee Vs. Independent Contractor

dollarsFrom the Houston Chronicle

Employee Costs

In April 2010, the Bureau of Labor Statistics estimated that employer costs for employee compensation averaged $29.71 per hour, with wages accounting for 69.6 percent and benefits averaging 30.4 percent of the total employee cost. They found that civilian employer costs, including private industry and government workers, averaged $2.62 per hour for life, health and disability insurance or 8.8 percent of total compensation. Legally mandated benefits, including Social Security, Medicare, unemployment and workers’ compensation, totaled $2.30 per hour or 7.7 percent. Benefits that include paid leave, vacation, holiday pay, sick days and personal leave amounted to $2.06 per hour or 6.9 percent. Retirement and savings plans cost employers $1.32 per hour or 4.5 percent. Supplemental pay, such as overtime, shift differentials and bonuses, average 73 cents per hour or 2.5 percent.

Related Reading: How to Calculate Overhead for an Independent Contractor

Contractor Costs

According to Businessweek Magazine, employers can save up to 30 percent by hiring an independent contractor because they avoid paying payroll taxes, unemployment insurance, workers’ compensation and disability, as well as benefits that include pensions, sick days, health insurance and vacation time. Because independent contractors are considered self-employed, they must pay the federal government 15.3 percent for Social Security and Medicare, as well as any state or local taxes themselves. Classifying regular employees as contractors also gives businesses the freedom to evade minimum wage requirements and overtime mandates as well.

Hidden Costs

However, the cost of misclassifying employees is steep. The New York Times reports that California Attorney General Jerry Brown won a $13 million judgment against two companies that misclassified 300 janitors. The Illinois Department of Labor was awarded $328,500 in penalty fees from a home improvement company that misclassified 18 workers. In New York State, commissioner M. Patricia Smith says her task force has identified more than 31,000 instances of misclassification, bringing in $11 in unpaid unemployment taxes and $14.5 million in unpaid wages since late 2007….”

Read the full story at Costs of an Employee Vs. Independent Contractor

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