Should I Hire an Employee or Independent Contractor?

There are so many places you can post open positions online, tight labor markets to compete in, and more that make hiring complicated.  

Another thing to consider is the type of worker you want to hire. At some point, you may be faced with an important question: is it best to hire an employee or independent contractor? Since there are pros and cons of both, you never want to jump the gun and make a rash decision. Along with the pros and cons, there is the important subject of payroll to consider when making a new hire.

When to Hire a Contractor

Although every small business is in a unique position, there are times when it makes the most sense to hire an employee vs independent contractor. Consider hiring a contractor when the following scenarios are at hand:

• You don't have employees on staff to handle specific tasks
• Uncertain demand at the present time (you don't know how long you will require the person's services)
• The job task requires a specialized skill

When to Hire an Employee

As tempting as it may be to hire contractors time after time, you must consider the fact that you can only control contractors to a certain degree. Here are some circumstances in which it makes more sense to hire an employee:

• Ability to assign specific tasks at any time, without worrying that you are "crossing the line" that could get you into hot water with the IRS
• Assurance that the person is going to work exclusively for your company
• Opportunity to provide targeted training related to the position

Benefits of Hiring a Contractor

So, you now have a better idea of when to hire a contractor and when to hire an employee. However, that may not answer your question as to which option is right for your company at the present time.

Here’s an interesting statistic from the United States Department of Labor Bureau of Labor Statistics:

“Independent contractors remained the largest of four alternative arrangements, making up 6.9 percent of total employment in May 2017. The second-largest category was on-call workers, at 1.7 percent. Temporary help agency workers accounted for 0.9 percent of total employment, and workers provided by contract firms made up 0.6 percent of total employment.”

While independent contractors lag far behind traditional employees in regards to total employment, it’s a growing number that shows just how popular this category has become.

Some of the benefits of going down this path include:

• Less overhead: Do you want to save money on benefits, office space, and other overhead costs? If so, bringing a contractor on board is the way to go. You may be surprised to find that hiring a contractor saves you thousands of dollars on overhead alone. And that doesn’t even take into consideration salary and other compensation.
• Staffing flexibility: With a contractor, you can bring them on board when you need them. Since you’re not paying them as an employee or treating them as an employee, you have flexibility with staffing and your arrangement in general.
• Reduce training expenses: When you hire a contractor, you expect to bring a specialist on board who doesn’t require a lot of training. And, not only will you save on training expenses, but the person is ready to hit the ground running.

Benefits of Hiring an Employee

If you’re on the fence about hiring a contractor, take a closer look at some of the benefits of hiring a traditional employee:

• More control: You can only control a contractor to a certain degree, but with an employee you’re able to set their schedule while telling them exactly how they should work.
• Stability: With an employee, there’s often less concern about the person leaving the company for another opportunity. Furthermore, since they’re only working for your company, there are no concerns about spreading themselves too thin.

How Independent Contractors and Employees Affect Your Payroll

You might be surprised to learn that payroll requirements will differ between independent contractors and employees. With contractors, chances are that you will be paying them a set fee that the two of you agree upon. In this situation, you are not required to withhold payroll taxes from the fee established. When you have an employee, the requirements are different as you will have to withhold payroll taxes from each paycheck. Additionally, depending on whether you hire an exempt or non-exempt employee, there will be rules for how much money you are required to pay your employee.

Bottom Line

It can be a challenge to decide if you should hire an employee or independent contractor. If you have any questions regarding how this will impact your tax situation, review this information from the IRS while also working closely with an experienced accountant or attorney. At the end of the day, there is no right or wrong answer as to who you should hire based on your business. That decision comes down to the type of business you have and what your long-term business goals are. No matter who you decide, it’s important to follow some onboarding guidelines to make sure requirements are understood on all sides of this new working relationship.