Contractor vs Employee - Which One Does Your Business Need?
Wondering about the difference between a contractor and an employee for your business? Get insight into how you can use each to help your bottom line.
When running a business, you need different types of people for all the tasks in your operations. Sometimes, you really need an employee for 40 hours a week and other times, you just need them for a quick, occasional task
Luckily, you can make a choice here - you can hire employees or independent contractors, depending on your needs.
Both types of employees have their own specific benefits and drawbacks, so it's important to understand the difference between them before making any important hiring decisions.
Today, we'll cover the basics of contractor vs. employee so that you can hire the right people, save money, and have your business running like clockwork. You'll find out if an independent contractor relationship makes more sense than hiring in-house so you can make better hiring decisions.
Who is a contractor?
A contractor (usually called an independent contractor) is an individual or a company that provides services to another business.
Independent contractors are usually hired for a specific project or task, and they are not considered to be salaried employees of the company they are working for.
In most cases, independent contractors are paid by the hour, day, or project, and they are not eligible for benefits like health insurance, vacation days or other perks, like employees are for instance.
Independent contractors get paid a fixed sum and they’re responsible for paying their own benefits, self employment taxes, insurance, and other costs.
Some examples of independent contractors include a marketing agency creating content for your blog, a freelance designer creating banners for your social media or a developer fixing your website.
An independent contractor doesn’t have to work for a single company - they can be employed by as many businesses as they want and just send invoices for the services performed.
Who is an employee?
An employee is an individual who works for a company on a full-time, permanent basis.
Employees are typically paid a salary. Most of the time, they are also eligible for benefits like health insurance, vacation days, sick pay, paid gym memberships and more. In short, employees receive a net salary while the employer is in charge of paying all the income taxes, benefits and costs on top of the wages paid.
Employees also have the potential to earn raises and promotions within the company, unlike independent contractors who have their own fixed fees usually.
There are different types of employees that companies can have in their teams, such as:
- full-time employees,
- part-time employees,
- casual employees,
- fixed-term employees,
- shift workers,
- daily hire and weekly hire employees,
- apprentices and trainees
to name a few examples.
Employees usually work for a single employer and in most countries, they cannot legally have multiple ones.
What is the difference between an independent contractor and an employee?
There are a few key differences between independent contractors and employees that you should be aware of before making your decision. While money is a major concern, there are lots of other considerations to keep in mind.
Here are the most important ones.
#1 Employees are typically paid a salary, while independent contractors are paid per hour, project or task
Your employees will typically have a set salary for their position. They get paid the same every month, regardless of how much they work. That means that a writer can do 10 or 40 hours of work per week and they’ll still have the same salary at the end of the month.
At the end of each month (or some other time period), your business pays your employees. On the other hand, independent contractors submit invoices for the work performed.
In other words, you pay independent contractors as you need them. If you know that you only need a website page redesign, you can pay a contractor designer for 10 hours and call it a day.
In situations like these, it makes no sense to hire a full-time, salaried employee as you only need the services of a certain person for a few hours per month. It makes more sense for your business to hire an independent contractor to get the job done with a different business relationship.
This leaves room for flexibility as you can call in independent contractors as you need them. If the workload goes up to 40 hours per week, you can offer them a salaried position as an employee in your business, changing their independent contractor status.
Note that the hourly wage of an independent contractor is higher than that of an employee since they need to pay for their own taxes, work-related costs, equipment, and more.
#2 Your business pays additional costs for the employees, contractors pay for themselves
If you hire an employee as a business, you’re required to pay additional costs on top of their salary. What these items are, depends on many things in your employment relationship, but primarily where you’re located and the federal and state laws in your country.
Some of those costs can include:
- health insurance
- taxes (such as income tax)
- social security costs
- workers compensation insurance
- retirement savings plans (401k or pension plan in the United States)
- paid time off
- work equipment
All of this means that the salary that your employees get is only a portion of what you pay as the employer. You can use a salary tax calculator to find out what this means. For example, if you operate in Alabama, USA and you want to pay an employee $46k per year, you will have to pay them a total gross salary of $60k, which includes all the federal employment taxes and other costs.
From a company standpoint, contractors are much easier to handle as a form of employment relationship. They work for a flat rate, e.g. $60 per hour. You pay them $600 for 10 hours of work and you don’t have to pay any employee benefits, taxes, or insurance on top.
However, the independent contractor is registered as a business and they have to pay their own taxes and costs too. Therefore, don’t be surprised that the hourly wage of a contractor is significantly higher because of their employee status.
#3 Employees work only for you, contractors can work for anyone
When you hire a salaried employee, that means that they are signing a contract that they work only for your business. No matter the scope of work hours, you are their one and only employer.
On the other hand, contractors can work for as many clients as they want. In fact, they can even subcontract a part of the work you give them to someone else as an independent business. For example, they can offer consulting services to any business entity they want.
This does not necessarily mean that contractors are a worse choice. It only means that there is a chance that they won’t be able to complete the work you want, when you want. This employment relationship is not for everyone, so make sure to do your research beforehand as a small business owner.
#4 Employees use work-provided equipment, contractors use their own tools
Your employees will typically get all the tools they need for work from you as the employer. Even if they work remotely, you are the one to provide them with a laptop or any other related tools for the job.
Contractors use their own equipment, which can include hardware, specialized tools and programs as well as their own internet connection and office space. All of this means two things:
- you should be careful about what you give them access to and impose stricter company control
- because of all these items, it’s only natural that it costs more to hire them per hour, day or project
So, which one does your business need?
It really depends on your specific needs and circumstances. You should evaluate the following factors:
- How many hours you need the person for
- What kind of tasks you need them to do
- How much you’re willing to pay
- Is there a necessity for this kind of work on an ongoing basis
- What makes more sense for your business from a legal standpoint
In essence, you need to evaluate your needs as a company, from a long-term perspective. Making the wrong choice could cost you significant time and money and make it difficult to handle your day-to-day operations.
Independent contractor vs. employee: how to decide?
The decision to hire an employee or an independent contractor is not an easy one, especially if it’s a crucial task for your business. It requires careful consideration and analysis of your company's needs and goals - not just the task at hand.
Here are the key factors you want to keep in mind when deciding which of the two you want to hire.
#1 First, think about how long you need someone for
If you only need someone for a short period of time, it may be more time-effective to hire an independent contractor. If you know that you only need 5 hours of specific design work per week, an independent contractor is a much better choice.
On the other hand, if you know that a person could do design for your website, social media, application, emails and other tasks, you can consider hiring a full-time employee.
You will have them in your office for 40 hours a week and they can do more than a single task. Also, they’ll be always at your disposal for new tasks that are a part of their role.
You need to carefully consider if the work you have on your plate now is enough to warrant hiring a full-time employee. If you give someone a salary and they’re really only working 20 hours a week, it makes more sense to hire a contractor.
Also, if you have busy periods of the year with extra work, it makes more sense to bring in independent contractors to handle the additional workload. For example, ecommerce stores have more business around Christmas, and it’s not unusual to hire an extra set of hands for sales or customer support just for a month or two.
#2 Consider your budget
As mentioned above, the price of hiring an employee is usually much greater than hiring an independent contractor for a shorter time. Maybe you don’t even have the budget for hiring someone as an employee at all.
In the short term, hiring an independent contractor costs less. If they come in and do 20 hours of work, paying them a slightly higher hourly rate makes sense for your bottom line.
Although, if you have to call in independent contractors to complete similar work every week, add up the numbers because it may just make more sense to pay $5,000 per month for an employee than paying the same amount for a contractor.
All in all, sit down with your accountant (that you should have as a registered business) and crunch the numbers before making a final decisions.
#3 Finally, think about what type of work you need to have done
Some tasks are better suited for independent contractors, while others are better suited for employees.
When you decide to hire a contractor, you are essentially hiring someone with a specific set of skills and expertise needed to complete the task or project at hand.
Your independent contractors are usually specialized in the tasks you’re looking to get done, so chances are they might complete them more effectively your regular employees.
However, if you would like your workplace to be full of people with a holistic approach and multitasking skills, willing to take care of several aspects of a worker's job at the same time, employees might be the better choice.
While employees might not be 100% specialized to do one specific thing, they can always make up for it by having some skills in other, equally important areas.
How to know that you're hiring the right person for the job?
Whether you’re hiring an employee or a contractor, you want to make sure that you’re hiring someone capable of doing the job. Here are few ways to make sure you’re on the right track.
#1 Check the qualifications
You don’t want to hire a Java developer that has never written a line of code, be it an employee or a contractor. The key aspect of hiring is making sure they actually know their stuff. We suggest doing the following, in no particular order:
- check their references (with other small business owners, read online reviews if hiring an agency, get in touch with previous employers/clients)
- ask for their portfolio and samples of work
- do a background check on them (either by yourself or hire a company specializing in this type of work)
- give them a paid test task
In an age where posing as someone else is a real threat, doing all of these ensures that you’re working with someone reliable and trustworthy.
#2 Be clear about your expectations for the job
Whether you’re hiring an independent contractor or an employee, this person needs to know what specifically you want them to do. For employees, this information should be in the job description. For independent contractors, you should include it in their briefs.
To set the right expectations, be crystal clear about what the job entails. Explain the following:
- what the person should do
- what the metric for success is for that job
- what milestones the employee/independent contractor should hit
- what other people in your team they will collaborate with
- what tools they will need to work with to get the job done
- how long they’re expected to take to finish the job
When hiring employees, more factors come into play with this employment relationship. Besides the technical aspects of getting the job done, you also want to hire someone who’s a great team player and fits into your team culture, which brings us to our next point.
#3 Make sure you like the person you're hiring
By nature of their employment relationship, independent contractors are less in contact with other employees in your company. They come in, get the job done and you can ask them to come back once you have more work for them.
On the other hand, hiring an employee means that you’re adding another person to your team - someone who collaborates with their own team and the entire company.
In either case, you want to make sure that you’re a good fit in terms of culture and communication. With employees, you can figure this out during your job interviews where you can ask more personal questions.
With independent contractors, it’s not as easy because the person you talk to is not always the person who does the job. However, if the communication does not feel right from the start, consider it as a sign to take your business elsewhere.
Now you know the difference between employees and independent contractors, as well as how to pick the best option for your business.
The choice between independent contractor vs. employee is not always easy. However, getting it right means having a better workflow, improving your operations and saving money.
After hiring your new employee or independent contractor, we also recommend making use of human resource management tools like Sloneek. It will take your new hire onboarding experience to the next level, and you won’t have to worry about a single thing thanks to its many automation features. Your human resources team will love you and you'll save time and money.
If you enjoyed this article, check out our other, similar releases. Other than that, thanks for stopping by and good luck with the hiring process!
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