If you're a small business owner who is looking to hire on a few workers, you may be searching for ways to reduce your payroll budget. It's no secret that hiring employees can be costly, especially considering employers are responsible for paying federal payroll taxes, unemployment taxes, and health benefits. Some companies have used a workaround by hiring independent contractors or temporary employees, rather than full-time employees, to their workforce. While it may seem that independent contractors and temporary workers are interchangeable, they are not. The two statuses are very different, and they should be treated differently by business owners. 

What is a Temporary Employee?

A temporary employee is a worker who is hired on a short-term basis only. Generally, a temporary employee is chosen from a staffing service pool based on his or her skill set and experience. If the service finds a suitable worker who is a good fit for your business, you'll be able to hire him or her during a trial period. During this time, the worker is not employed by you. Rather, he or she is employed by the temp service. In most cases, temporary employees are only hired to add workers during high sales periods.

What is an Independent Contractor?

An independent contractor, though, is a worker who is hired to provide services on a contractual basis. Independent contractors may be hired for a short time or a long time. The key to determining if a worker qualifies as an independent contractor is to examine the nature of the individual's relationship with the business. As a general rule, if a worker has the right to choose when and where he or she works, and if he or she does not provide critical services that are necessary to the operation of the company, then the individual may qualify as an independent contractor.

The Similarities and Differences Between the Two

Whether you hire a temporary employee or an independent contractor, you'll be able to reduce your payroll expenses. In both cases, you can reduce your business taxes by avoiding the usual federal and state payroll taxes. You'll also get a break on federal and state unemployment taxes, as well as health or medical benefits. The difference is in why you won't be required to pay these costs.

With a temporary employee, the staffing service that provides the worker takes on the responsibility for paying these charges. Rather than having to foot the bill for these costs, you'll simply pay the staffing service. On the other hand, if you hire a worker as an independent contractor, the worker assumes the responsibility for paying these charges in the form of self-employment taxes.

Knowing the differences between temporary workers and independent contractors is important when you're deciding how to hire more workers for your company. Both options can save you money if you use them properly.