Your business and workload are expanding, creating the need for another set of hands. This is a great scenario for your small business. But, it can also create some anxiety. Can you really afford to add a full-time employee? Will you have enough long-term work to justify the hire?

As a small-business owner, these are questions you are often faced with as you decide if you should add to your staff. Fortunately, you have options. You can hire a 1099 independent contractor if you’re not quite ready to add a W-2 full-time employee. Contractors can take on the work of an employee but come with less overhead expenses and regulations.

The terms “1099 contractors” and “W-2 employees” refer to the tax forms each type of employee will need. 1099 contractors are workers you hire on a contract (usually temporary) basis, while W-2 employees are those you hire and add to your business payroll. At the end of the calendar year, businesses issue 1099 forms to contractors detailing the wages paid to those contractors, and W-2s to employees showing employees’ wages and the taxes withheld from those wages.

Learn the difference between hiring an employee versus an independent contractor and the pros and cons that come with both.

hiring an employee vs an independent contractor

What is a full-time employee?

According to the IRS, a company can control the work performance of someone classified as an employee. This means you can dictate how and when they complete work.

However, hiring an employee goes beyond supervising his or her work. When you hire a person onto your staff you are committing to train that person, to include him or her on your staff long-term, and to provide him or her with benefits and a safe and quality work environment.

Pros of hiring full-time employees

For some companies, it can be important to hire a full-time employee rather than a contractor for the stability and the ability to set his or her schedule and priorities. Other benefits can include:

  • Dictating the projects and assignments he or she works on, in the order you want.
  • Training the individual the way you want, assuring he or she will complete the work in a certain way and follow specific processes.
  • Requiring that he or she only works for you and not another company.
  • Having the ability to terminate the employee without having to pay out a large pre-agreed upon contract.
  • Providing stability for your company. As your company grows, employees will improve their skills and eventually learn enough to be promoted to manager or supervisor positions.
  • Improved ability to recruit, as many people value the stability of a W-2 job over a contract.

Cons of hiring full-time employees

While there are many benefits to hiring a full-time employee, there can also be disadvantages, as employees come with more regulations. Some of these can include:

  • Following all federal and state laws related to payment of wages and salaries and other labor laws
  • Complying with all payroll tax requirements. These rules mandate that you pay for a portion of the employee’s FICA taxes and collect the rest from the employee, making your payroll more complicated.
  • Paying unemployment insurance if you terminate an employee.
  • Paying for worker’s compensation insurance if an employee is injured on the job.

Other costs associated with hiring full-time employees

When you hire a full-time employee, you take on more financial obligations than just a salary or wages. There are also additional costs the company can be responsible for paying. According to the Boston Business Journal, these can include:

  • Standard benefits packages like health, dental and vision insurance. While the employee typically makes a contribution to these plans, the employer usually pays for a portion as well.
  • 401(k) matches, if offered by the company.
  • Paid employee time off for vacation or sick days. These cost businesses money in lost labor and productivity.
  • Standard purchases such as desk, computer, phone or other materials to create a work station for the employee.

Exempt vs. non-exempt employees

Another consideration when assembling your staff is the difference between exempt and non-exempt employees. These terms refer to those who are eligible to work overtime (and therefore earn overtime wages) and those who are not. Exempt employees are not eligible for overtime wages, hence the name. Non-exempt employees are entitled to overtime wages for overtime hours.

It’s always best to check with a legal professional to make sure you understand the laws in your state. In addition, check with the U.S. Department of Labor for their guidelines on what constitutes an exempt or non-exempt employee.

What is an independent contractor?

An independent contractor is an individual who works with a company, but who cannot be controlled in terms of how or in what order work will be done, according to the IRS. The company can only control the results of the work, not the process by which it is created.

This relationship allows the company to receive the final output but lets the contractor follow his or her own process to complete it.

Pros of hiring a contractor

Hiring a contractor can be more affordable and come with fewer requirements than a full-time employee. Some of the advantages of hiring a contractor can include:

  • Not having to pay full-time benefits.
  • Not having to follow the same strict federal and state labor laws as you do for a full-time employee.
  • Less reporting, tax and payroll responsibilities, as you don’t have to withhold or pay FICA taxes
  • Ability to pay contractors efficiently through emailable eChecks. This can protect their information and let them get paid quickly.
  • Not having to set up a work station or pay for tools like a computer or phone.

Cons of hiring a contractor

While hiring a contractor can result in less financial and legal liabilities for a company, it also means you have less control over the individual. Some of the disadvantages of hiring a contractor are:

  • Not controlling how an individual does his or her work and what process he or she follows.
  • Not being able to set the person’s hours.
  • Not being able to control what other companies he or she works for.
  • Not controlling how a contractor will mesh with your full-time staff.
  • Possibly paying significantly higher hourly rates.

Employee vs. contractor checklist: Which is right for your company?

Deciding between hiring an employee and a contractor typically comes down to what your company needs. To help determine which type of worker is best for you and your company, consider these questions:

  • Can the work be done outside of your supervision?
  • Can the work be completed at any time, without needing to set exact hours?
  • Do you trust the individual to complete the work?
  • Do you want to save money on overhead fees taxes, benefits, and materials?
  • Do you need someone to complete a project or short-term work?

If you answered “yes” to these questions, then the work can likely be done by a contractor instead of a full-time employee.

Make the best decision for your small business

When choosing between hiring a full-time employee and a contractor it’s important to make sure your company’s needs are being met. When making the decision, determine if you can allow the work to be completed from beyond your supervision and if you trust the individual to complete the work to a satisfactory level, and review what the financial obligations are for an employee versus a contractor.

Hiring contractors to perform the work of a full-time employee can be considered tax fraud. It’s always a good idea to consult with a lawyer or employment professional in your area to determine which approach is right for your business.

To learn more about making hiring decisions and other information vital to your company, read more in our Small Business Resource Center.

Get the financial know-how you need

Learn the 6 finance essentials every business needs to succeed in our free eBook, Finance Fundamentals.

Was this useful?
1 0
More on this Topic

Select leaders from large and small financial institutions share in-depth perspectives on the future of treasury management.

2 min read