It’s difficult to run a business alone. Even operating just a small business involves a lot of processes, such as inventory management, production, marketing, selling, accounting, bookkeeping, taxation, and housekeeping. That is why business owners find people to help them run their business smoothly. But letting someone or some people to join your team can lead to the following question.
Should you hire an employee or hire an independent contractor for your business?
If you’re a business owner or someone who’s just planning to establish your firm, I bet you’ve already asked that question.
Now, I will try to give you some ideas that will somehow guide you on making a good decision. So let’s have a quick comparison between the two options.
Employee
Independent contractor/professional
There’s an employee-employer relationship, and the employer is bound to obey the applicable labor laws.
There’s no employee-employer relationship. The contractor/professional is independent from your company.
As an employer, you’re required to pay the employer’s share for their SSS, Philhealth and Pag-ibig contributions.
The independent or self-employed professional is the one who pays his own SSS, Philhealth and Pag-ibig contributions.
You pay salaries and wages as a compensation to the employee. In the Philippines, it is usually paid semi-monthly. You are also required to pay 13th month pay, overtime pay and other employee’s benefits in accordance with the law.
You pay professional or contractor’s fee as a compensation to the independent contractor based on your agreement. It is usually paid per hour, per day or per project. You’re not required to pay 13th month pay or overtime pay to an independent professional if it’s not in your contract of agreement.
You withheld tax from the compensation you pay to the employee, then file/pay the withholding tax payable using BIR Form 1601-C (monthly) and BIR Form 1604-CF (annually).
You withheld tax from the fees you pay to the professional/contractor, then file/pay the withholding tax payable using BIR Form 1601-E (monthly) and BIR Form 1604-E (annually).
You need your employees to secure Taxpayers’ Identification Number (TIN) to properly withhold tax from their compensation. Employees can usually easily obtain TIN from the BIR.
You need the independent professional/contractor to have TIN and be registered with the BIR as self-employed taxpayers to properly withhold tax from their income. There’s a tendency that if the independent professional/contractor is not yet registered with the BIR, he will find it hard to comply with your withholding process. Independent professionals also need to issue Official Receipts, and this could be a problem if the professional you hire isn’t registered yet with the BIR and doesn’t have an OR yet to issue for his service to you.
You declare salaries and wages in your income tax return, and it should be reconciled with your “withholding tax on compensation” declarations.
You declare professional/contractor fees in your income tax return, and it should be reconciled with your “expanded withholding tax” declarations.
The employee you hire may require further training and professional development to be fit in your company. It will require time and money to fully train an employee.
An independent professional/contractor is usually a seasoned worker and doesn’t already need a training that is sponsored by your company.
An employee is usually an in-house worker who will utilize your office space, furniture, equipment, and other office stuff. Some employees (cloud employees) can work at their home though.
Independent professionals have their own registered address. Thus, they usually don’t work at your office and utilize your furniture and equipment. However, independent contractors may also utilize your office if needed.
The comparison above is just a quick view of the differences between hiring an employee and getting the service of an independent professional or contractor, especially when it comes to tax matters and compliance with the law. Remember that the decision still lies in you, and it depends on your specific, unique and actual scenario.
So what do you think do you need, an employee or an independent contractor? Or maybe you are needing them both.
If you have any other ideas and insights about the differences between the two, feel free to share it to us by making a comment below.
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