Did you start your business to do more of what you love? Or because you have a better solution than what already exists? You didn’t start it because you wanted to do a bunch of busywork, or because you wanted to stay up on all night doing research, tinkering with landing pages, or putting out fires. It may be time to get help, and you may be weighing the differences between hiring an employee vs. contractor.
As your business grows, you’re likely becoming overwhelmed with responsibilities and daily tasks that take time and energy away from the work that you enjoy. Or, you may not realize that you’re limiting your company’s growth by hanging on to tasks you could be delegating.
If you feel like you’re burning the candle at both ends it’s time to get help. As you scale your business, it’ll become increasingly important that you’re spending your energy on high-level, strategic, and creative decisions instead of getting distracted by day-to-day tasks and admin that someone else can easily handle for you.
Before you take the leap to expand your team, you should evaluate the pros and cons of hiring an employee vs. an independent contractor. I often field questions from my clients on this topic. In this article, I’m going to share the key differences you should consider when you’re ready to grow!
Payment & Costs of Employees vs. Contractors
Employees have different requirements than contractors do of their clients. They also get paid differently.
Employees typically collect their income from employers through wages or a salary. With an employee, you’re responsible for complying with federal and state regulations related to the payment of wages, overtime, and other work rules. You’ll also need to cover payroll taxes, social security, Medicare, unemployment insurance, and worker’s compensation. Most full-time employees will also require some benefits like paid time off, health insurance, death and disability insurance, and retirement savings. Managing payroll and benefits seemed daunting to me. Keep in mind that if hiring seems like the way to go, there are services that will handle all of this for you.
Contractors collect their income from clients on a contractual or per-project basis. Contractors pay their own taxes and don’t require benefits like health insurance or paid time off. Other fees may include late fees, add-ons, and “kill fees” (penalties for cutting projects short), which should all be addressed in the terms and conditions of a contract. In general, contractors are usually less expensive than employees in the long run when you factor in the taxes, benefits, and overhead costs of managing employees.
Legal Definition of Employees vs. Contractors According to the IRS
The IRS has defined what makes a worker an employee or an independent contractor. This information is essential for understanding when you’re required to withhold Social Security, Medicare, and unemployment tax, and to ensure you’re in compliance with federal laws.
Employees follow your direction on their assigned workflow, how you’d like the job done, where you’d like them to work, what tools they use, and if and how they work for other people (your customers). If you’re trying to manage when or where your contractor works (or if you’re trying to avoid payroll taxes by classifying an employee as a contractor), you have an employee and you’d better classify them that way, lest ye incur the wrath of the IRS.
If you’re hoping to have long-term continuity or train someone to eventually take on more roles and responsibilities, it’s probably better to hire an employee. You’re really looking for a team member, someone willing to make a mutual investment in your business. You’re paying them (hopefully well), offering benefits, and hoping to teach them more about the business over time as it grows.
Contractors, unlike employees, can determine how a project is delivered. According to the IRS, the general rule is that a worker is an independent contractor if the employer (you) has the right to control or direct only the result of the work and the delivery deadline for the work. You don’t control what will be done and where, when, and how it will be done and should need minimal oversight.
Contractors do best when they’re assigned distinct, well-defined projects or tasks. They are helpful when you have unexpected or seasonal overflow work that your team can’t handle, low-level administrative tasks that don’t warrant a full-time employee or high-level specialty tasks like an attorney or CPA.
Employee or Contractor: Which one is right for me?
Choosing between an employee and a contractor will depend on the role and responsibility you have in mind. Many businesses have a mix of employees and contractors, depending on their needs. Employees are best for long-term, essential functions, whereas contractors a better for short-term or highly specialized work.
Hire an employee if:
- The work requires your supervision or ongoing input
- You want the work to be delivered with specific tools or methods
- You have a consistent need for support
- You have ongoing work that supports your core business operations
- You can accommodate paying for wages and other required employee expenses
- You want to train someone who can grow in their role and grow with your business
Hire a contractor if:
- The work doesn’t require your supervision or ongoing input
- You’re concerned with the result, not the means by which it’s achieved
- It’s a project that is either short-term or requires specialized skills
- The work is not core to your business operations
- You don’t want to get tied down in managing a new team member
- You prefer a one-time upfront cost instead of ongoing wages and other payments
Before you make an official decision, review the IRS guidance on if your new team member counts as an employee or an independent contractor. If you classify them incorrectly, there may be significant financial and legal consequences. I hope this guide helps you expand your team so that you can focus on high-level strategic planning, scaling, and having a greater impact.