Avoid Hiring Headaches: Should You Hire an Employee or a Contractor? 19 Sep 2018


Growing businesses have unique and varying needs. As you grow you may find yourself using more advanced tools & technology. With these upgrades, what do you do if something breaks down? Since you’re not an IT company, you need to hire someone. But with hiring comes other challenges like figuring out the type of employee you should hire.

In this article, we’ll discuss the differences between hiring an employee and a contractor. We’ll consider if it really matters, what are the differences, and how to figure out what you need for your company.

Does It Really Matter Which You Hire?

According to Kinesis Inc., in the professional services industry, each employee represents roughly $100-$200k in annual top-line revenue. So making a bad hire isn’t really an option for companies that don’t have resources to spare.

Apart from the income incentive of making the right hire, there are many differences in your relationship with a contractor and an employee. These differences include taxes, the degree of control over how work is done and work hours, how many jobs the employee can take on, benefits they qualify for, and even how they’re paid.

When choosing who to hire, it’s important to know that the conditions they work under may automatically classify them as an employee, and you could be liable to fines for misrepresenting them. You can find out which 20 factors the IRS uses to classify people as employees here. So, it’s important to understand the differences.

Employee vs. Contractor; What’s the Difference?

Contractor working from a remote location

When you’re choosing an employee over a contractor, you have to take into account the differences in financial and behavioral control as well as the change in your working relationship. Let’s look at 6 ways these change how you work together.

  1. Work location. One big difference between employees and contractors is where they work. Employees usually work at your place of business and have set hours. Contractors usually work from a remote location and set their own hours. Take this into consideration if this person will be working on a team, or if you prefer they work at your location frequently.
  2. Oversight. When working with employees, employers can have them perform jobs or tasks a specific way and provide the tools needed for the job. On the other hand, a contractor can decide how they want to do the project and the employer only gets a say in the end result. Contractors also provide their own tools.
  3. Who they work for. Contractors can work for whoever they want and may not be willing to sign a non-compete agreement. With employees, you can stipulate in their contract whether or not they can work for other people while working for you. Employees are also more likely to sign non-compete agreements.
  4. How they are paid. Employees are typically paid a salary or hourly wage, have taxes taken out of their paycheck, and the company pays a percentage of taxes for them. Contractors are their own business entity which means they pay their own taxes and may be paid by project or by hours worked. They also don’t qualify for overtime and charge more than employees to compensate for their increased expenses and sporadic work.
  5. Benefits. Employees usually get benefits such as vacation days, health insurance, workers comp, and unemployment benefits. Contractors don’t get these benefits.
  6. Skillset. Employees may have to be trained to do certain things or take on certain projects. Contractors are expected to have the skills needed for the project, although they may need some time to learn your specific business.

Which Kind of Worker Best Fits Your Business?

Now that you understand the differences between contractors and employees, it’s time to think about your business needs. You can use these questions to help you analyze your situation:

  1. Is the work part of your main offering or is it an infrequent problem you need help with?
  2. Do you need a specialist? Or will someone with general knowledge and skills for the position be able to handle the assignment?
  3. Do you have the skills to train for this position?
  4. What is your budget? What does a contractor cost vs. an employee?
  5. How fast do you need to get this project done?

Employees are best suited for jobs that need to be performed, require set hours, and are a major part of your business. For example, if you run a web design company your designers shouldn’t all be contract workers. This would make it difficult to deliver quality work consistently.

Contractors are best suited for temporary jobs, small necessary projects, and jobs that require professional expertise that your team doesn’t have. It’s also good to hire contractors for jobs that don’t fall within your business’ scope of work. You wouldn’t want to hire full-time web developers if you’re an accounting firm.

Don’t Stop Improving Your Hiring Process

In this article, we talked about the differences between a contractor and an employee, why it matters, and how you can figure out what you need. We hoped this helped you with your small business’s hiring needs. If you want to improve your hiring process even further, download our ebook Supercharge Your Hiring Process.