Businesses are run by people! It starts with the owners, CEO and managers, and trickles down to the employees and staff. People carry the bulk of management tasks, service and production tasks, and supply chain-related tasks. Since real human beings largely carry out most business functions, the payroll and salaries expense is often one of the largest accounts that a company has to pay off.
For some businesses, this expense may be difficult to shoulder. As such, many companies find themselves amid a dilemma when deciding to hire regular employees or independent contractors. While some prefer one over the other, other companies choose a mix of both.
One of the biggest things to consider when deciding what kind of people to hire is the financial implications related to the hiring of regular employees, contract workers, or any other type of worker or service provider. To help you out, here are salient financial matters that you must ponder should your company hire employees or independent contractors.
1. Labor Laws on Protection
One clear distinction that you must recognize in the employee vs. independent contractor dilemma is the status of the worker and the protection offered to them by Philippine law.
Employees
Employees are entitled to obtain full benefits and protections offered to them by the Department of Labor and Employment (DOLE), the Philippine body that governs employee and employer relationships and ensures the protection of both parties under the Philippine Labor Code.
Such protections and benefits include:
- Minimum wage salary – at least
- Promptness and proper timing of compensation
- Prohibitions on salary deductions
- Mandatory compensation on holidays
- Overtime Pay and 13th-month pay
The list of protections offered to employees must thoroughly be taken note of by the employer as they will have to comply.
Contractors
The Labor Code does not cover independent contractors. As such, all benefits and protections are negotiated by the independent contractor with the employer and be settled, commonly, through contracts. Any breach of contract by either the contractor or employer must be settled in court.
2. Tax on Compensation
Employees
Employees are subject to withholding tax, which is essentially a tax on the income of employees. It is payroll-related and mandated by the PH government. Employers must deduct and hold a certain percent of an employee’s wages and then pay that deducted amount to the BIR.
Contractors
In the case of the contractor-employee relationship, the withholding tax must be deducted from the payments to contractors, consultants, or service providers and is payable by the employer’s company. As a result, contractors often make negotiations to ensure that the salary they wish to receive is net of withholding tax.
3. Contributions to Government Agencies
Employee
Companies are required to spend on benefits for all employees. This includes:
- Social Security System (SSS)
- Pag-IBIG – Also known as the Home Development Mutual Fund
- PhilHealth – Philippine Health Insurance
These payments are an additional cost to the employer. A portion of the contributions will be taken from the employee’s salary and remitted to the corresponding agency. The employers will then make an additional contribution for the employee on top of the employee’s contributions.
Contractors
Businesses are NOT mandated to pay benefits for contractors. Should contractors wish to make contributions to the agencies mentioned above, they must do it themselves. The employers are in no way responsible for making any such contributions. Contractors may, however, include benefits in their service prices.
4. 13th Month Pay
Employees
All employees are entitled to receive 13th-month pay and should receive them on or before the 24th of December each year. This additional bonus is equivalent to 1/12th of the employees’ annual salary.
Contractors
Contractors are not entitled to any 13th-month pay. However, the contractor may bill the 13th-month pay to their pricing model, which will then be negotiated with the employer.
5. Other Related Costs
Employee
To carry out tasks, employees will require the needed equipment, tools, and supplies to do such. These requisites for work, which may include laptops, uniforms, travel stipends, and facilities, and even training sessions must be billed to the company and handled by the HR team.
Contractors
Often, businesses hire independent contractors for their niche skills. The payment for service rendered is already inclusive of the use of the contractor’s own resources, equipment and facilities.
6. Other Benefits
Employees can enjoy other regular benefits like sick leaves with pay, rice allotment, health benefits, transportation allowances, and the like.
Contractors
In contrast, contractors must shoulder everything out of their own pockets. They are not entitled to receive any of these benefits.
Final Word
The decision whether to hire employees, independent contractors, or a mix of both will depend on your needs as a business as well as your resources. If you need any assistance in making this decision, consider contacting professionals to help you work out costs and weigh your options.
Give our firm a call so that we can assess your books to help you decide which is the right option for you based on your financial standing. We also offer bookkeeping and accounting services to ensure your company’s financial health stays on track. In addition, we offer free 30 minute consultations.
