by Theresa B. – Get free updates of new post here.
Every small business owner eventually needs some help. If you plan to expand and gain more market share, then you can’t be the sole staff of every department. With this realization comes the question, “Should I hire employees or independent contractors?”.
Before we go further into this topic, here’s a brief introduction to these terms.
An employee is a person who is hired for wages and salary under an implied contract of work. Their employer has the right to control the details of their work, such as work hours, assigned tasks, location of work, and so on. The employer has a significant amount of control over the actions of an employee within the structure of their work agreement.
Independent contractors are business owners just like you. They provide services to organizations under a verbal or (preferably) written agreement. They often work with several employers at a time and are responsible for their working arrangements.
Going back to our question… “Should I hire employees or independent contractors?”
There’s no definitive answer that applies to every small business. Your hiring decisions will be based on reasons that are unique to your business. Some companies will gain more benefits from hiring employees, while others will grow better with independent contractors. Before you make a final decision, it’s essential to get familiar with the costs and benefits of both options.
Hiring Employees vs. Independent Contractors
Here are the essential factors to consider when choosing to hire employees or independent contractors.
As a business, you’re responsible for providing the infrastructure needed by employees. They need a suitable workspace, technical equipment, software, and so on. You’re also responsible for the recurring bills on all tools and services used by your team. Employees are not expected to pay out of their pockets to support any of the running costs of your business. Even if they do, they expect to be fully reimbursed. If you choose to hire employees, then you should be ready to support all these expenses.
Independent contractors are responsible for their own running costs. They provide their own tools, workspaces, and coffee. The only compensation expected from the businesses they work with is the agreed rate. If a contractor needs an expensive gadget or service to complete the job, they’ll often inform the client ahead of time. If not, everything spent on their tasks is expected to be covered in the agreed rate.
Employers are expected to pay their employees a full salary. The exact numbers will depend on their location and job requirements. The payment package will also include contributions to their health insurance, pension plans, life insurance, paid leave, bonuses, and so on. If you’re a small business with a lower profit margin, consider these remuneration requirements before taking on an employee. Once you do, you have to either pay them or lay them off, which can be very challenging.
The only payment which independent contractors expect from a business is the agreed fee. It is left to you to decide if a tip or bonus will be included. Contractors are responsible for their insurance, pension plans, vacation costs, and so on. They are also responsible for handling their taxes, which are independent of their clients’ accounting.
Value for money
Whether you offer 32 or 40-hour workweeks, employees are usually available for as long as you need them. You can fill their days up with tasks within the structure of your contract. This means that you could be getting full value for your money. However, if you do not have enough functions for your employees, you could be losing money. Essentially, you will be paying someone to sit around. This means that your investment in their time may not be paying off for the business.
Contractors are need-specific. You only pay them for as long as you need them. Businesses and contractors usually agree on either a per-project or per-hour payment plan. If your business is not big enough to keep employers busy throughout the week, contractors are recommended. This way, you can manage costs and pay for what is needed only.
As an employer, you have more range to supervise the work of your employees. You can guide them through the preferred practices of your business, so their work is more on-brand. You can also better control the output of their work to ensure that the results you get are in line with what you want. Employees can also provide direct feedback on the tasks they are given, their complaints, or suggestions to improve on value. Building a relationship also enhances communication and sets the workplace culture for future growth.
Business owners have limited access to the contractors they work with. They may communicate using email, video chat, and collaboration tools, but that’s the extent of their working relationship. A business owner can’t directly supervise a contractor. The most you can do is provide your brand guidelines and ask them to follow. Contractors often have their preferred tools and methods and may choose to use them instead of what you offer. As the paying party, you definitely have some control over the output of work. However, this control will be limited.
Protection of trade secrets
Employees are bound by contract to protect your trade secrets. The added advantage that they only work for one company at a time makes it easy to keep sensitive company information in-house. As you work together and build positive workplace culture, employees could also develop a sense of loyalty to your business. They may also make independent effort to protect your business.
While independent contractors may sign NDAs and other legally binding agreements, there’s no concrete way to control their actions. Primarily if they work with similar brands in your industry. If you’re sharing company secrets with contractors, it’s mostly based on your expectations on their work ethics. If a contractor leaks trade secrets, the cost of legal action may stop you from going after them. Especially as a small business (possibly) without a stand-by legal team.
Taxes and government regulations
The employer is expected to collect and file payroll taxes to the internal revenue service in your state or country. If this is not done, the penalties will fall on the employer, not the employees.
Contractors are responsible for filing their own taxes. According to the IRS, freelance contractors are considered as both employer and employee. They will let your business know, ahead of time, about the tax requirements that come with working with them.
The final decision to hire employees or independent contractors depends on your business needs. You may choose to hire an employee for one role (e.g., customer service), and an independent contractor for another (e.g., accounting). In any case, I would recommend using a contractor for as long as you can. Make the switch to full-time employers when your business has the workload and can pay the salary.
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