When deciding whether to hire employees or independent contractors, many businesses focus primarily on cost. While hiring independent contractors may appear more economical at first glance, the full financial picture is more nuanced, and there are times when the employment model ends up being the better choice, particularly if requirements and burdens of independent contractor compliance are factored in. So making the decision of whether to hire employees or independent contractors should never be a decision that is based purely on initial costs, especially when cost doesn’t tell the full story.
Below is a comparison of typical costs for hiring an independent contractor versus an employee based on a 20-hour workweek (using clerical and construction workers, as examples), followed by our key takeaways and considerations. [Note that this comparison is only for small businesses (50 employees or less), as there are additional costs that come into play for large businesses].
| Employment Costs | Independent Contractor | Clerical Employee (Minimum Legal Benefits) | Construction Remodeling Employee (Minimum Legal Benefits) |
| Hourly Rate | $35 | $28 (lower due to benefits) | $28 (lower due to benefits) |
| Weekly Cost | $700 | $560 | $560 |
| Payroll Taxes | |||
| Social Security (FICA) 6.2% on wages (up to $176,100 in 2025) | $0 | $34.72 | $34.72 |
| Medicare (FICA) 1.45% of wages (0.9% over $200,000) | $0 | $ 8.12 | $ 8.12 |
| Federal Unemployment (FUTA) ~0.6% on first $7,000 wages (after state SUTA credits) | $0 | $ 3.36 (applies to 12.5 weeks only) | $ 3.36 (applies to 12.5 weeks only) |
| Washington State Unemployment (SUTA) Rate varies based on claims, industry and history of late payments; average rate is 1.35% on the first $72,800 wages | $0 | $ 7.56 | $ 7.56 |
| Washington State Workers’ Compensation Varies by job type and claims; for example ~$0.11 per hour for clerical work; ~$2.45 per hour for remodeling; Rate lookup: https://www.lni.wa.gov/apps/riskclasslookup/ | $0 | $ 2.20 | $49.00 |
| Paid Sick Leave 1 hour of paid sick leave for every 40 hours worked; for 20 hours work a week would be ~3.25 days per year | $0 | .5 hour/week | .5 hour/week |
| Annual Totals | $36,400 | $31,877 (plus ~3.25 sick days) | $34,448 (plus ~3.25 sick days) |
If the above scenario were based on full-time work (40 hours per week) instead of 20 hours per week, the annual totals would approximately be:
- Independent Contractor: $72,800
- Clerical Employee: $63,752 (plus 6.5 paid sick days)
- Construction/Remodeling Employee: $68,620 (plus 6.5 paid sick days)
From the above comparison, you’ll note that there isn’t a drastic cost difference between hiring an independent contractor compared to hiring an employee (who is provided the mandatory benefits required by law). Labor cost, therefore, should not be the deciding factor that it often is.
Here, instead, are some of our key considerations for making this decision:
- Always choose the right classification. If the law dictates that your worker should be an employee, then hire the worker as an employee. It’s never a misstep to follow what the law clearly dictates.
- Don’t too quickly dismiss the employee option as too expensive. Businesses often believe that the independent contractor choice is the obvious choice. That is, you agree on a rate with the independent contractor and you’re done. No payroll taxes, no benefits, no paperwork, no hassle. But as shown in the table above, there may not be as drastic a difference in costs in hiring a contractor compared to an employee, particularly if you limit yourself to providing only the mandatory benefits to the employee.
- Misclassification can be costly. The independent contractor option can easily be the more expensive option if it’s the wrong legal classification. Misclassification can trigger audits by state and federal agencies leading to substantial assessments including back taxes, penalties and interest.
- Don’t ignore that operating with employees offers greater freedom and flexibility. Hiring employees gives you freedom to work with them in the manner that suits your business. By contrast, when working with independent contractors, you’re substantially limited in how you’re able to use them in running and growing your business. These restrictions can prevent you from doing what you need to do to grow your business and generate more revenue. So it’s quite possible that going the independent contractor route could be hindering your business, rather than helping it.
As shown above, choosing between hiring an employee or an independent contractor involves more than just comparing hourly rates. It is therefore essential to consider the full scope of costs, compliance requirements, and your vision for how you want to run your business. And if you decide your independent contractor choice was not, or is no longer, the right choice for your business, see our blog post discussing considerations for converting independent contractors to employees: https://mercerlawpllc.com/key-considerations-for-converting-independent-contractors-to-employees/