Hiring a Contractor Vs. Employee – What is the Difference
We know that getting ready to hire and actually going through the process can feel like an overwhelming mountain to climb. It feels like you have 1,287 things to learn about the intricacies of different positions, titles, types of hires, tasks, job descriptions, etc. But one of the first things that needs to be decided on first is - are you ready to hire a contractor or an employee?
Don’t worry. In this blog, we’re going to share our best hiring tips and clearly tell you the differences between hiring a contractor and an employee.
What is a contractor?
First things first let’s define what a contractor is. You don't always have to hire a permanent employee for every role. If your service-based business needs someone with specific skills for a short-term project, it could make sense to hire a contractor instead.
Contractors are not part of your permanent workforce. They aren't your employees. In fact, it’s important to keep in mind that you are their client. They are typically a one-person business that works for other businesses for a short period of time. Whether it's for a couple of weeks or a few months, hiring a contractor could help your small business to grow in a more flexible way.
But contractors aren't suitable for every role. We’ll get into that more later.
What is an employee?
An employee is a worker who does a job defined by you. As their employer, you control what they need to deliver and how it should be done. While an employee might have some freedom (like flexible hours), you ultimately have the right to manage and direct them.
The paperwork and budgeting
When you work with a contractor there will typically be a contract in place which stipulates what your relationship is for, what the nature of the work is, how it is handled, and what the schedule looks like. Other than that there isn’t a ton of other paperwork involved. Since contractors file their own taxes you’ll need to collect a W-9 and most likely file a 1099 on the contractor as well.
However, when it comes to hiring an employee, you have to be registered in the state where they reside. The state-level paperwork needs to be filed once you have paid them their first payroll. A lot of people are intimidated by paperwork, but you don’t need to be. There is so much help when it comes to this. For example, there are payroll providers out there to help you simplify this process. (and not just for employees, you can use payroll providers like Gusto for your contractors too).
When it comes to budgeting for your employees, you should consider a budget of 20% over their wages to handle personnel taxes, and some basic benefits. When you start to add more benefits, you’ll need to look at budgeting a bit more for healthcare. We are at the point where it’s about 25% or 30% above their salary.
Feeling overwhelmed? When it comes to dollars and cents per hour, an employee is actually much more affordable than you might realize. Usually for contractors, you’re paying a premium because you have fewer hours of their time and they’re filling a specialized role in your business.
Setting expectations
Besides the paperwork, there are other aspects to take into consideration. As we mentioned earlier, when you hire a contractor, you’re actually their client. They are NOT an employee. This is important to know beforehand because there are certain expectations you need to prepare for.
When you hire a contractor, they work on specific tasks needed by you or your business. These tasks are done without a permanent employment relationship. So while you specify the results of their work, they have more control over how the work is done. For example, if you have a last-minute project request, your contractor may or may not have the bandwidth to take on that project for you. You will also probably get charged a rush fee on top of your regular payments.
Whereas an employee will work specific hours as directed by you and whatever needs to be done whether it be last-minute decisions or special projects, your employee will essentially have the time and capacity to do what’s in the best interest of your business.
Why hire a contractor?
Okay, so now that we’ve talked about some basic differences between contractors and employees. Let’s talk about why you would hire a contractor in the first place.
One of the main reasons to hire a contractor is to get access to skills that you don’t have. For example, a web designer might be hired to redo your website. Or you might hire an interior designer to create a dreamy office space. Another example might be an accountant because you don’t have the background or knowledge to run your own numbers.
Another reason you might hire a contractor right now is because of the lower overhead. There’s no need to provide company benefits, holiday pay, sick pay, employer taxes, or pension to contractors. As a business owner, you might not be at a place where you can provide that to an employee right now, so hiring a contractor might be the way to go.
Why hire an employee?
Contractors are not replacements for employees. They both have their places but there are definitely situations where hiring a contractor isn’t the best decision. For example, if you really want to build a team, then having contractors that come and go doesn’t really build morale or create a stable team environment.
Another reason hiring an employee might be the way to go is when you want to invest in the future of your business. You’ll want to have people on your team who you can trust to develop the business with you. Hiring a contractor helps your business through periods of growth or difficulty but they don't actually add value to the core business.
Thinking of hiring but still not sure what to do?
Hiring is not only one of our favorite topics, but it’s also a huge part of what we teach inside The Incubator. We’ll help you build your dream week, create the systems through your CRM and project management system to set you up for success, package your offer properly, build leadership and management skills, make sure your numbers are sustainable for a team, and so much more.
Go ahead and apply here to watch our free private training that’s all about creating systems that will allow you to increase your client capacity without sacrificing your client experience. Then, let us know you applied in our DMs on Instagram @bossproject!
