Hiring vs. Contracting – What is best for your small business?
The decision to get help from an independent contractor or hire a full-time employee is an important one for any small to medium-sized business owner. In most growing workplaces, independent contractors and employees often work side-by-side. Yet, the choice to hire one or the other is different for every organization as each option carries a distinct set of pros and cons. How do you decide what’s best for your business?
With the rise of the “gig economy,” there are 21.1 million 1099-contractors in the U.S. according to the Freelancers Union – making up 14 percent of the nation’s workforce. Its increasing prevalence gives business owners more choices in getting the help they need for their successful business. However, there are very important legal differences between the two that go beyond the job title. Their “employee” or “contractor” designation affects how much you pay in taxes, whether you need to withhold from your workers’ paychecks, and what tax documents you need to file.
What is the difference between a hired employee and a contractor legally? Below are seven distinctions to take into consideration when determining if it is best to hire an independent contractor or an employee:
|Employment Laws||Covered by a number of federal and state employment and labor laws.||Not covered by employment and labor laws.|
|Hiring Practice||A potential employee completes an application that is handled by Human Resources. If approved, the applicant receives a job offer. After a person accepts the position, the employer must ask for additional information about the employee such as date of birth, marital status, and citizenship status.||A potential contractor normally interacts with the person or department that wants a certain service or task completed. A potential contractor might complete a proposal. The contractor enters into a contract, including a Statement of Work with the legal or procurement section of the business.|
|Tax Documents||Provides name, address, Social Security number, tax filing status, and number of exemptions on a W-4.||Provides name, address, Taxpayer Identification Number, and certification about back up withholding on a W-9.|
|Payer’s Tax Reporting Requirements||Reports all money paid to the employee during the tax year on a W-2.||Reports payments of $600 or more in a calendar year on a Form 1099.|
|Reporting to Other Agencies||Reports for state and federal Unemployment Insurance.||None.|
|Value of Work or Contract||Earns either an hourly rate or a salary.||A contract may be for a total amount. It could be for an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed.|
|When Paid||An employee pay period must remain the same unless formally changed. Pay periods vary from one week to one month. Federal and state laws require that an employee be paid on the normal pay date or earlier if the paycheck is not negotiable on the normal pay date, which can occur on holidays.||Accounts Payable pays a contractor after receiving an invoice. The terms of the contract or Statement of Work dictate when payments are made, such as upon completion of a task or by periodic amounts. Contractors are not paid by payroll staff in most businesses.|
Why hire an employee?
When you hire an employee, the employer has the right to control the details of her or her work performance. You get the advantage of being able to completely control and direct the employee’s work during that time, train the person in the way you want the job done, and to require that person to work only for you.
Below are some key deciding factors of choosing to hire an employee over an independent contractor:
- The function you need assistance with is a core competency of your business. For example, if you owned a gym, you would not want to outsource the role of the trainers – who should be specifically skilled and trained in your gym’s processes and procedures to deliver the same results to each client. However, you may choose to contract out a cleaning service responsible for giving your facilities a deep clean every evening.
- The activities involve highly confidential or trade secrets that could damage your business if made public. While you may include a confidentiality clause in your contract with an independent contractor, once their contracted work is over, they may continue to use your proprietary methods with other clients. If this is a concern of yours, consider hiring rather than outsourcing.
- You have a specific work culture that must be evident throughout everything you do and everyone you work with. Independent contractors tend to work independently and may not feel the same morale and camaraderie towards your company and other employees. Employees are members of a team and that shared culture can be vital to the future success of your business. The informal “water cooler” talk in the office plays an important role in building team unity.
- You are a large organization with a strong employer brand. Similar to the point above, as your company grows, you may find that bringing all your functions in-house provides a level of stability and engagement that can be hard to get from someone who is not a fully committed part of your company. Cutting costs by hiring contract workers can sometimes lead to less productivity.
Why hire a contractor?
As technology changes, enabling an ever-increasing number of people to work off-site, the use of independent contractors is growing! Many business owners enjoy the flexibility of bringing on independent contractors as needed, and when the project is done the independent contractor moves on – no need to fire someone when workloads change.
Below are some additional deciding factors when deciding to hire an independent contractor over an employee:
- They provide concentrated expertise. While employees typically receive some sort of training surrounding their job duties, independent contractors bring specialized expertise to a project or task. As their client, you are not responsible for providing them with training. For example, if your business is looking to increase their social media presence, but doesn’t quite know how to get started, hiring a contractor who specializes in social media may be the best solution for you.
- They provide a simpler onboarding process. As stated above, independent contractors are hired on a project because of their specialized knowledge, so they can hit the ground running when assigned a task. You won’t need to pay for the recruitment of an employee or their training. They have their own processes and procedures on how to get things done, and they rarely need the same level of education around company history, culture and vision as employees do.
- Guaranteed continuation and no downtime. When you work with a specialized independent contractor agency, it guarantees that there will be no unscheduled stops like vacation breaks, sickness or scrambling for a replacement on a long-term leave. Most agencies work on accounts as a team and can fill in when specific individuals are out of the office. You receive more manpower than a single employee on the job.
- No need to invest in equipment. While in the grand scheme of things, investing in the equipment needed to do a job may be minuscule, for many small to medium-sized businesses these added expenses can be a burden to provide upfront. When you outsource, the contractor carries the expenses of the tools they need to complete the job – including specialized equipment like design tools or software.
- No need to pay benefits. Save money by only paying for the time and resources spent on your work. No need to pay into the “hidden paycheck” of employer-subsidized health, life, disability and retirement benefits – as well as PTO and other work perks you provide to your employees.
Now that you are informed on a few of the benefits of each designation, as well as the legal differences between the two categories of workers, how do you decide what is right for your business? Here are a few questions to ask yourself:
- Whether the work is temporary or permanent? If you need help with a one-time project or a task that takes up less than 40-hours a week, consider seeking out an independent contractor. If you are in need of someone to tackle a consistently time-intensive workload, consider hiring a full-time employee.
- Are you willing to loosen the reins? Contractors have their own way of doing things and often work on their own schedule. If you have systems and processes in place and like to make sure every job is completed just the way you like it, consider hiring an employee. If you are not an expert in a subject and are looking for someone to complete a job without the need to be overseen every step of the way, an independent contractor may be a perfect addition to your team.
- What is the turnaround time on your project? Do you often have a project that needs to get done stat? Be sure to get an estimated deadline if you are seeking out an independent contractor for the task. Contractors often work on multiple clients at a time, and may not be able to get to a task as quickly as a hired employee. On the other hand, independent contractors also have more manpower than a single employee and often pool their resources for clients in a bind on a need-to-need basis.
- What is your budget compared to the estimated amount of time the work will take? Do you have enough work to keep a full-time employee busy? If so, can you afford to pay their salary and benefits package?
As you can see, it sometimes makes more sense to engage the services of an independent contractor, while other times you must hire an employee to make sure your business runs as it should. If you need help weighing out the pros and cons of this “great debate,” contact Accelerate ActionCOACH. We can talk you through who to hire based on the needs of your organization.
Hiring an independent contractor vs. an employee was a recent topic of discussion in Think Like an Owner Academy. Learn more about TLO Academy, a management development trainee program that educates key managers on the general ins and outs of running a business.