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.
Victorino Q. Abrugar is a marketing strategist and business consultant from Tacloban City, Philippines. Vic has been in the online marketing industry for more than 7 years, practicing problogging, web development, content marketing, SEO, social media marketing, and consulting.
Thank you for a very clear discussion on the merits (and demerits) of hiring an independent consultant. I appreciate very much your use of conversational English and jargon-free discourse.
I have just recently discovered your blogsite and will refer to it frequently as I start my independent consultancy in the Philippines.
More power to you.
What would you recommend if given a choice to become an employee or a contractor?
Hi there.
Thank you for the very comprehensive comparison between an employee and an IC.
Im currently an IC of a well known company in the Philippines and now going on a 12th year come July of this year.
However, I have a small conversation with my colleague who is also an IC like me. She happened to be a former part of the HR team from her previous employer, specifically Employee Benefits etc. She mentioned few things that needs a thorough clarifications:
1. that being an IC entitles me also to a company paid/remitted SSS, Pag-ibig and Philhealth contrinutions;
2. that being an IC (who I was also given a position as Sales Manager for the last 4years but was demoted), still entitles me to keep the basic pay/professional fee. Meaning it should not be removed from me at the time I was demoted from the job;
3. that being an IC still entitles me a separation pay.
I hope you can give me your inputs on this so I can have this share to my co-IC’s and immediately address my concerns fto our HR personnel.
Thank you and all the best!
Godbless!
Is it fair to an IC to work 9hrs a day without overtime pay? and we are required to submit receipts equivalent to our commision and incentive pay outs?
Hi Sir Vic,
I would like to know what are the tax applicable for a sole proprietorship whose line of business is in construction? My services will only be a labor contract to the general contractor and my workers are just minimum wage earners. I also declared that my home address is my office.
Hi Vic,
Thank you for enlightening us with this topic.
I am engaged in a Data Encoding Project based kind of business. I have been contemplating if I can hire the “keyers” as Independent Contractors, and what other clauses like government mandated remittance will I need to comply with. I will provide the facility and the program, they will just be hired to key the documents. I hope you can help me with this.
Thanks,
Steph
Hi,
What about night differential? If a company drafted an PSA contract and assigned you to work at their office during the nightshift, are you entitled to night differential? Are you required to work at the office at all?
What if I hire an independent contractor but he is not registered yet?
I think I can deduct 10-15%, am I right? Do you have a guide for that case? Thanks