Hiring Employees or Contractors. What You Need to Know.

October 31, 2020
Business Basics
Hiring Employees or Contractors. What You Need to Know.

When you own a business such as a corporation or LLC, chances are you need to delegate work to other individuals or start hiring employees in order for the business to function efficiently and effectively. It can be difficult to hire individuals who mesh well with your company, but often it is necessary. When you pay another individual to do work or services on behalf of your business, you need to appropriately account for that payment come tax time as well as consider benefits for the individual. Two common routes of hiring are employees (brought in on a salary) and contractors (paid on a project or contract basis). Deciding between the two will depend on the needs of your business, what your business can afford, and how you operate.

Differences Between Employees and Contractors

Both employees and contractors are individuals hired on behalf of a company to do a job. However, the government and a business can treat each differently and for good reason. Many people hire contractors for the flexibility that having an individual on contract provides as well as the available tax breaks. However, you can’t hire someone as a contractor and continue to treat them like an employee. Key differences between employees and contractors exist in the function and role of the individual within that business, the level of autonomy and decision making that individual has in performing their duties, and in how that expense is calculated by the government.Employees are taken on when a business can afford to pay an employee an annual salary, provide a commitment term, agree to terms of services, pay the employee at least twice monthly, and pay the taxes associated with an employee. Contractors are taken on usually when none of these things can be agreed upon or provided, or if a business needs to take on help for a shorter period of time. Contractors can be hired on as a one-time job, for seasonal work, or for regular work. The contract exists between the individual and the employer; so an individual could work a job identical to a salaried employee while still retaining the benefits of “being their own boss,” filing taxes as self-employed, and determining terms of their employment.

Advantages of Hiring Employees vs. Contractors

Regardless of what your business can afford, there are distinct advantages to hiring an employee and a contractor. When hiring an employee, for example, you are able to legally provide terms and conditions for the employee’s work. Within the terms and conditions are agreements for pay, including late or faulty payments, direct deposit, and termination of work, as well as things like scheduling, expectations, management roles, insurance, and so on. Many businesses prefer this method of hiring as it allows them more control over the business processes.While very similar (if not identical) terms and conditions might exist for a contractor, an employer has significantly more control over the role of services of their employees. One area of this is in determining the time frames of work and expectations around work successes and failures. This is one of the biggest advantages of hiring employees versus contractors.The financial benefits of hiring employees are minimal. You might be able to negotiate a lower salary compared to a contractor simply because you are paying into taxes on their behalf. However, one major benefit is that you are more likely to secure an individual (as an employee) who is more dedicated and reliable to the company since they are on a salary and they have job security. Reliability is not always the case as many contractors are extremely reliable, especially if the terms of the work contract are the same year over year, and both the employer and contractor trust each other. One benefit of hiring contractors is that you are giving your contractors the freedom to conduct a business of their own, and in turn are entering into a business relationship with that individual. They may be more professional and able to work on their own. With contractors, you don’t need to pay additional payroll taxes, but you may need to increase their pay to account for the contractor paying their own taxes. You also don’t have to offer benefits, such as medical insurance.

Disadvantages of Hiring Employees vs. Contractors

With the above advantages come many disadvantages. For instance, employees are offering benefits and the company has to issue payroll taxes to the government. A company that has an employee is required to withhold and pay federal income tax from employee wages, as well as federal and state unemployment tax and social security taxes. Therefore, businesses with employees end up paying more per employee than what the employee is receiving in their paycheck. It might also take longer to hire an employee and onboard them entirely, which means that there is a significant delay in getting an employee to begin work. Contractors, on the other hand, aren’t perfect and there are many downsides to hiring contractors. At any time a contractor can not show up to work and you would be left with a project on the go with minimal or no help to complete it. You might also find yourself constantly negotiating a contract if the business relationship is not fluid.

Should You Hire Employees or Contractors?

When it comes to hiring individuals to work for your company, your business should consider what you need in terms of help. If you know you have long-term funding or revenue and you want to find a reliable worker, then you can consider an employee or you can consider a long-term contractor with long-term benefits programs. If you don’t want to deal with things like medical or payroll taxes, contractors are the way to go. They are also easier for small businesses to deal with since there are fewer formalities to consider. Both employees and contractors can be beneficial and harmful to a company. There are industries that utilize contractors over employees, as well. For example, construction companies largely use contractors to give flexibility to their workers. If a business is leaning towards hiring contractors, then they might expect a higher turnover than normal. However, financially, hiring contractors might make better economical sense. Hiring contractors on job boards is a very popular route to go for digital and remote companies. However, it is important when working with remote contractors to find a secure company or liaison company that can deal with mitigation and provide legal services in case the job is not completed or a dispute arises.

State Filing Fee
Registered Agent
Prepared for Me
No items found.
Mentorship Icon

Business Courses coming soon! 

We are launching courses on entrprenureship, marketing, business operations, and SaaS. Sign up to receive an email about when the courses go live. We will be giving away copies of the courses to some of our email subscribers.

Latest Articles

All Articles
The Ultimate Guide to Becoming a Seller on Fiverr

The Ultimate Guide to Becoming a Seller on Fiverr

Business Basics
Business Marketing
Business Operations
Small Business