Episode 368: Show Notes
We’ve heard from a lot of people that going from contractors to employees is complicated, expensive and overwhelming, so for a long time, we avoided going down that road. But then we started looking into it and considered all the potentially good stuff about having employees, such as having more control over how they spend their time and when they work. On today’s episode, we want to talk about all the things to think about before hiring an employee, because the truth is, it is very different and a much bigger responsibility than working with a contractor.
There are pros and cons to both, though, and that is why we share with you our experience over the last few years, so that you can be prepared for whichever scenario you choose. It’s all about looking at your business and figuring out whether you are in a financial position to take on a full time employee and whether you are prepared to deal with the positives and negatives of each option. Join us for everything you need to know about the people who do work for your business!
The Difference Between a Contractor and an Employee
A contractor is someone who is under a contract with you and they are signing on for either a specific number of hours or a specific project – whatever the contract states. But importantly, they are their own entity, which means that they oversee their own income, reporting their own taxes and all the other things that involve running a business. For us, it was a problem that we couldn’t decide when a contractor worked, what hours they showed up and we could not set definite deadlines. While the two of us work more traditional working hours, many of our contractors would work at night or over weekends, and those on the other side of the world would be on entirely different schedules. We needed people who could work the same hours as us. If someone is an employee, they are dedicated to your business and not out there trying to find other clients. Contractors, on the other hand, are focused on their own goals and sometimes your business might not be a priority to them. When it comes to hiring and on-boarding employees, you want to make sure you are picking someone who is going to stick around long term and who won’t leave at the next best opportunity, because training people takes time and money.
Things to Consider Before Hiring an Employee
We saw a lot of benefits to having an employee, specifically someone who is local. We’ve often worked with people outside of our state but having someone close by who can stop by for a quick meeting when you need, is super convenient! Here are a few things you want to think about before hiring an employee: You need a clear job description and a budget. And when you’ve set the budget, add some more dollars to it, because things like taxes also take a chunk out of your finances. Remember also that employees take a toll on your cash flow because unlike contractors whom you can pay on your company credit card (which gives you 45 days to pay), employees are paid out of your checking account which takes literal dollars. So, as a small business, you could easily run into a cash flow crisis. In returning to budget, you need to know how much you can spend on an employee in total. This includes more than what they get paid because having an employee involves other additional costs, such as a payroll provider fee and company taxes. You can add 10 to 20% on top of what you are going to pay that person. The other big consideration with employees is that they must get paid leave and you might even consider including health care or contributing to a 401(k). All these things cost you money. Different states also have different requirements as far as benefits are concerned, and so it might be best to consult with a CPA or human resource expert in your area.
Managing the Payroll Paperwork
There is a lot of paperwork when it comes to employees and human resources. This is where one of our regular sponsors, Gusto, really shines! Gusto is our payroll provider and they take care of a big part of the paperwork on your behalf. When something gets misfiled or there is confusion anywhere, you will have to call the state or the hotline, and this can be overwhelming. Think about this, if you are thinking about hiring an employee – there is no HR department that magically comes along. You have to actually then perform the HR function, and that takes time, which takes money. Since we got Gusto, we’ve had minimal issues with paperwork in this regard. We had some difficulty when Emylee moved to another state, because then different tax regulations applied, so be sure to stay on top of state requirements.
After You’ve Gone Through the Hiring Process
After you have established the job description, set the budget and got your paperwork in order, there are a few other things that may come up for you. While you can budget as best you can, just remember businesses like ours still experience fluctuation. The fluctuation that we weren’t necessarily prepared for was the discrepancy between different months: what is true this month no longer applies next month, so there is always a degree of risk and unpredictability involved. For the months that didn’t go as well as we planned, we could pay ourselves less and adjust what we took out of the business according to how well we did. But with an employee, you can’t do that. So, if you’ve had a tough month, having to pay that employee his or her full salary can really take its toll on your cash flow. What might be a really good idea is to have a bank account with six to twelve months of their salary sitting there in cash so that if anything were to happen, you have that buffer. If we had to draw a conclusion, we wouldn’t be able to say we choose contractors over employees or vice versa, both have their pros and cons. It’s about deciding what you are ready for financially.
The Difference Between a Contractor and an Employee. [0:02:37.1]
Things to Consider Before Hiring an Employee. [0:08:50.1]
Managing the Payroll Paperwork. [0:20:15.1]
After You’ve Gone Through the Hiring Process. [0:24:25.1]