How do I decide whether to hire a contractor or employee?
Q: Dear Ruchi, After many months of hard work, my business is finally taking off! I have been extremely busy and short-handed which I know means it’s time to hire help. I am weary and uncertain of how to go about this process and am unsure whether to start working with a contractor or hire an official employee. Quite frankly, I’m not too sure what the difference would be or which one would be a smarter financial decision. Please help!
A: When it comes time to hire outside help for your business it’s totally understandable when feelings of uncertainty come up! You are now starting to distribute your hard-earned income for the betterment of your business by investing in valued team members.
We know that no business can survive without people and understanding how to properly classify those people is very important! Just because you hire someone does not necessarily mean they are an employee and at the end of the day this can play a big role in your expenses and legal matters. Advising with a trusted accountant or lawyer is a great place to start when considering a decision like this. For me, it was also very important to factor in the core work that my team offers to clients vs non-core work.
To help you make the best decision for your business, below are 3 ways to easily differentiate between hiring a contractor vs. an employee.
Behavior
A business owner has the right to control what an employee does and how they do their job (e.g. hours, location). On the other hand, an independent contractor holds themselves available for more than one client, may have a website to advertise their services, and are typically hired to deliver a project or for non-core work. Independent contractors have more flexibility in how and when they work, as long as they deliver the final job scope based on the contract.
Finances
An independent contractor is typically responsible financially for the tools they use for a client and may charge on an hourly or flat fee basis. An employee will use an employer’s equipment, such as computers, when doing their work and is entitled to be paid on a regular, on-going basis. Additionally, businesses withhold income taxes, Medicare, Social Security, and other withholdings based on local and federal requirements for employees, but not for independent contractors.
Type of Relationship
Employees typically receive specific benefits from an employer, such as vacation time, sick days, and health insurance. Contractors are financially responsible for their own insurance. If you hire an independent contractor, they are not entitled to the same benefits as employees.
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Here’s to your prosperity!
Ruchi