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 an independent contractor if you’re not quite ready to add a full-time employee. Contractors can take on the work of an employee but come with less overhead expenses and regulations.
Learn the difference between hiring an employee versus an independent contractor and the pros and cons that come with both.
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 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. According to The Balance Small Business, 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.
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.
- 401K 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.
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.
Setting up a contractor
When hiring a contractor, there are certain steps you must take. Some of these can include:
- Having the individual sign an agreement or contract. This should include language stating there will not be federal withholdings or benefits withheld from payments. It should also give the company the right to terminate the contract if the work isn’t satisfactory or if the contractor misses a deadline.
- Having the person sign a confidentiality or a non-disclosure agreement.
- Requiring the individual to complete a 1099-MISC tax form.
- Agreeing to a payment plan. Both you and the individual should sign off on this.
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
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. To learn more about making hiring decisions and other information vital to your company, read more in our Small Business Resource Center.