Speed
0.75×
1×
1.25×
1.5×
2×
3 min 58 sec
0:00
Maya needs help
0:20
Option one: a contractor
0:44
Option two: an employee
1:15
The label doesn't decide
1:54
What each really costs
2:30
Both in Beeswax
3:04
Recap and quiz
Accounting 101
·
People
·
Episode 16
Contractors and Employees
(Same work. Very different paperwork.)
Northlight is busy and Maya needs help: Rowan, a freelance developer, or Priya, an employee. What decides which is which, and what each one really costs.
contractors
employees
employment status
on-costs
Transcript
0:00
Northlight Studio is busy. Properly busy. Maya is working evenings, and her cat has started to look concerned.
0:10
She needs help. And there are two very different ways to get it. A contractor, or an employee.
0:20
Option one. Rowan, a freelance developer. Rowan runs his own little business. Sets his own hours. Uses his own laptop. Works for other clients too.
0:33
He sends Maya a bill. She pays it. For Maya, that's simply an expense. Contractors and freelancers. Rowan sorts out his own tax.
0:44
Option two. Priya, a junior designer, as an employee. Maya decides what Priya works on, and when. Priya uses the studio's equipment, and works for Northlight, and only Northlight.
0:59
Now Maya runs payroll. She takes tax out of Priya's pay, and hands it to the tax office. She pays employer contributions on top, like superannuation, pensions, or national insurance, depending on where you are. And Priya gets paid leave.
1:15
Here's the important bit. You don't get to choose by picking a label. Calling someone a contractor doesn't make them one.
1:23
Tax offices look at what the relationship is really like. Who controls the work? Whose tools are they? Can they send someone else to do it? Are they paid for a result, or for their hours? Do they work for anyone else?
1:37
Get it wrong, and you can owe back taxes, contributions and penalties. The tax office doesn't care what you called it. It cares what it looks like. The exact tests vary by country. The regional episodes have the details.
1:54
Now, cost. Rowan charges sixty an hour. Priya's salary works out at around thirty an hour. So an employee is half the price? Not quite.
2:05
Add the employer contributions, paid leave, equipment and the admin, and an employee often costs a good deal more than their salary. Contractors cost more per hour, but only for the hours you actually need.
2:19
Neither is better. They're different tools. Steady, ongoing work tends to suit an employee. Bursts and specialist skills tend to suit a contractor.
2:30
In Beeswax, a contractor is a supplier, just like any other. Their bills come in as expenses, coded to contractors and freelancers, and they appear in What I Owe until they're paid.
2:43
For US businesses, Beeswax totals what you've paid each contractor in the year, ready for form ten ninety-nine N E C.
2:52
Employees live in their own section, with their details, pay rates and leave. And for Australian and UK accounts, the payroll add-on runs their pay. Which is next time.
3:04
So. Contractors run their own business, and bill you. Employees work in yours, and you run payroll. The reality decides which is which, not the label. And the cheaper hourly rate isn't always the cheaper option.
3:19
Quick one. A designer sets their own hours, uses their own laptop, bills per project, and works for three other studios. Contractor, or employee?
3:30
Have a think.
3:34
Most likely a contractor. They control the work, use their own tools, and run their own business. But check your country's rules. It's never quite as simple as a quiz.
3:45
Maya's cat, meanwhile, remains unconvinced about either.
3:50
Next time: payroll. Gross pay, net pay, tax withheld, and the money that isn't yours even though it's in your bank.