Hiring employees or using contractors: How to grow your small business

July 30, 2021

Hiring employees or using contractors

Every business starts as a small business. The decisions you make as an entrepreneur or the owner of a small business will determine whether you will fail, remain a small business, or become a large company.

One of the most important decisions you will have to make as the owner of a small business is whether to hiring employees or using contractors to grow your business. Using contractors or employees to grow your business will each have advantages and disadvantages. It is up to you to decide which will be more beneficial for your business.

The first step in making your decision will be to understand the difference between the two types of workers.

Difference between hiring employees vs. using contractors

To put it simply, an employee is an individual you pay to solely offer their skills and knowledge for the benefit of your company. On the other hand, an independent contractor runs their own business and is hence self-employed. A contractor can offer their services to anyone while an employee only works for you.

To better understand the difference between hiring employees or using contractors, you should know the characteristics of each.

Characteristics of contractors

  • A contractor runs their own business and will perform vital business functions such as marketing, paying taxes, hiring staff, and financing. A contractor will also have higher rates as they are an organization with employees to pay.
  • A contractor will usually offer their services under a company name; hence you will find them in the B2B market. However, you can find contractors who are solo freelancers and will operate under a self-employed moniker.
  • A contractor will have their own tools which they use to perform various jobs. Contrarily, an employee will use the tools you give him.
  • Contractors have multiple clients hence have flexible hours to allow them to satisfy their different customers.

Characteristics of employees

  • Employees will only perform one function in a business; the role which you assign them.
  • Employees are bound by the employment agreement, operating procedures, and company policy as opposed to contractors who are free to perform their work as they see fit.
  • You may have to train your employees according to your company’s methods, whereas contractors have free reign over their operating procedures.
  • An employee will work for the number of hours you set, and you will have to pay them overtime for any extra work.
  • The distinction between employees and contractors can get blurred. You can use tools such as the IRS Form SS-8 to determine the status of your workers.

Tax obligations when hiring employees or using contractors

The tax rates and applications will further exacerbate the difference between employees and contractors. You will have different tax obligations as an employer for employees and contractors.

The IRS has serious guidelines about how to classify a worker when they are an employee or a contractor. If you misclassify a worker, you may be in serious trouble with the IRS.

When you hire a contractor, your tax duties will be relatively straightforward. The contractor will sign an IRS W-9 form that will give you the contractor’s name and tax ID number. If you pay the contractor more than $600 a year, you have to track the payments and fill a 1099 form which you will submit to the IRS and the contractor.

When you hire employees, your tax duties are more complicated than with contractors. The employee must first fill an IRS W-4 form. You will need to make various tax deductions from their pay, including federal income tax, social security, and Medicare taxes, among other payroll taxes.

You should also know that there are different payroll tax rates for employees depending on how much you pay them, starting from the minimum wage. Moreover, the applicable taxes may vary from state to state, so you need to know how much tax your particular state charges.

You need to provide each employee with a W-2 form at the end of the year as well as to the IRS. The document will outline all the various forms of compensation you offer the employee and all the tax deductions from their earnings.

Full-time employees vs contractors: Pros and cons

The answer to whether you should hiring employees or using contractors will depend on weighing the pros and cons of each.

The benefits of hiring an employee are you get a long-term commitment, have more control over employees, are more consistent, and can ingrain them into the company culture.

On the other hand, the disadvantages of employees are they lead to higher expenses, you have to offer them growth opportunities and are bound by Federal & state laws.

The pros of hiring contractors are you get a higher skill set, they cost less, you don’t have to supervise them, and they are great for short-term work.

The cons of hiring a contractor are that they are not loyal to one company, can be inconsistent, and have limited knowledge of your company and its products/services.

Conclusion

To sum up, you will have to consider the various factors and what are your needs to decide whether hiring employees or using contractors will improve your business. A conclusive and honest evaluation of your business is the best way to make the decision. Every business is different so ensure your decision suits your business.

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