When you own a small business, hopefully there comes a time when you grow enough that you are at the point where you need to begin to think about hiring help. That then begs the question:
Should you hire an employee or an independent contractor?
Is the difference between contractors and employees essentially a tax distinction? Not even close
How do you know if you’re ready to hire? Look at how you use your time. As Michael E. Gerber pointed out in The E Myth, as your company begins to grow, if you find yourself spending more time working in your business than working on your business, then you need to start looking for help.
Yes, you love the work you do, but in order for your company to thrive, you need to focus on the big picture. An employee or an independent contractor can do the job, but only you can run the business.
The Difference Between Contractors and Employees
Is your business ready for a full-time employee? Can you trust an independent contractor? As you know, contractors are in business for themselves, they file a 1099 with the IRS, and they are not subject to many of the laws designed to protect full- and part-time employees: contractors cannot claim overtime, they typically receive no benefits, and they legally can be paid less than the federal minimum wage.
So, is the difference between contractors and employees essentially a tax distinction? Absolutely not. Your workers, whether they are independent contractors or employees, will dramatically affect the culture of your business. That means you want to keep your business plan in mind as you prepare to take on staffers; knowing what your business needs, and what you may need further down the line, will help you navigate this difficult decision.
Contractors: Pros and Cons
Generally, hiring a contractor will cost you less, and require much less effort, than hiring a full-time employee. Contractors are responsible for filing independently with the IRS, so you will not need to pay the employer’s share of Social Security or Medicare taxes, and you won’t need to contribute to state and federal unemployment funds, either.
Additionally, by avoiding the costs associated with payroll, benefits, and expenses, working with contractors will help to keep your overhead as low as possible.
If your business is affected by periodic swings in revenue (a holiday sales rush, for example), then contractors can give the flexibility to meet new opportunities as they arise. This allows you to adjust your cost structure project-to-project. The last thing you want is to be paying an employee (and not just wages, but benefits, taxes and insurance), when there isn’t work to do.
And now the bad news. By hiring a contractor, you relinquish some measure of control over both the process and the finished product. And part of what makes a contractor independent is his or her ability to select and manage projects. Contractors can turn down contracts. And depending on the assignment and the current state of the market, they can negotiate a salary that may be two or three times higher than the hourly wage of an employee.
Employees: Pros and Cons
We’ve already touched on some of the costs associated with hiring employees. Keep in mind that you will also need to train and manage an employee. Ideally, your employee will be a self-starter, someone who can manage their own tasks without relying on your feedback, but if your new employee needs assistance, then you may find yourself spending more time on their work than your own.
But your employee is an investment. Yes, your time and energy is precious, that’s precisely why you’ve hired an full-time employee: in the long run, the time you time and money you will save by retaining a loyal, competent employee will pay dividends and then some.
And an employee can be trained to do, well, anything. More importantly, they can be trained to do several somethings at once. Being able to assign multiple administrative tasks to an employee can improve your work flow and free you up to focus on organizing projects, keeping up with contacts, and bringing in new business.
What’s your thought on the issue? Independent contractor, or full-time employee? Share your comment at The Self-Employed Facebook page today.