Should I Hire Employees or Contractors?

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Definitely had this question when my small business started to grow--should I hire an employee or a contractor?

Women-owned businesses are growing disproportionately to small businesses in the rest of the economy.

These businesses tend to start out as an entity of one. But when you experience growth, you need to get more hands on deck to handle the workload.

At this point, you’re faced with a question: do I hire employees, or do I contract it out?

Hiring Employees

Hiring employees means establishing loyalty and priority, but those things come at a cost.

Cons

  • You’ll have to pay payroll taxes.
  • In all likelihood, you’ll have to pay for healthcare.
  • To be competitive, you may have to offer a retirement plan.
  • Once you get big enough, you’ll have to hire someone to manage all those people.
  • Unless you have a completely remote staff, you’ll have to rent a bigger space.

Pros

It’s not all bad, though. There are some added benefits of having a staff that’s W-2’d:

  • All those benefits mean people are likely to stick around longer.
  • Less competing priorities.
  • More ability to delegate without renegotiating contracts.
  • Though you may need a manager or have to become one yourself, your team will be far easier to coordinate than a group of freelancers.

Hiring employees? Be sure you follow this 12-step process to keep everything legit.

Contractors

I operate primarily as a contractor. When I’ve needed assistance in my business, I’ve hired contractors rather than full- or part-time employees. While there’s good things about us, there are some undeniable hangups, as well.

Cons

  • Because there are no benefits, contractors don’t have as many scruples hopping from one job to the next. In fact, you probably aren’t your contractor’s only client.
  • Because you aren’t their only client, you may not always be priority #1. While I always try to make each of my clients feel like priority #1 and have been able to maintain some decently long relationships because of it, the fact remains that in order to pay the bills you almost always have to have more than one project going.
  • It’s difficult to coordinate contractors. They’re not all required to be in the same place at the same time for meetings, so communication may get fractured across different aspects of your project.
  • If you add tasks to a contractor’s workload, expect a conversation about contract renegotiations.

Pros

  • Contractors are cheap–even if you pay them more than you would a typical employee. No payroll taxes. No obligation for healthcare. No one’s expecting a 401(k) nonetheless a match.
  • Contractors tend to be extremely self-motivated. While coordinating between different aspects of a project may be difficult, once you sic them on a task they’ll likely require less management than a group of employees.
  • Contractors are much more likely to work remotely, reducing your overhead costs for rented space.
  • If you run into a budgeting problem, you can cut a contractor–or their hours–within the legal scope of your contract. This makes trimming costs easier when things are lean, and because you know they probably have other things going on in the background, you don’t necessarily have to feel like you’re putting them out of house and home (in most cases.)

The Best Way to Retain Workers

Once you’ve found good help,  you want to keep it, whether it’s coming from an employee or a contractor. The best ways to do this are to be fair in your compensation, flexible in your workplace structure and kind even in those teachable moments.

No matter who you hire, we’re all human beings, and the respect that breeds loyalty is a two-way street.

How have you handled new hires as your business grows?

 

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5 thoughts on “Should I Hire Employees or Contractors?

  1. Chonce

    While having employees at some point doesn’t sound like a bad idea, for now, I will stick to contractors. At this moment, their pros far outweigh the cons. Thanks for sharing!

    Reply
  2. Done by Forty

    Are independent contractors able to take advantage of the SEP IRA that business owners are? If so, that seems like a sneaky good benefit of not being a W-2 employee.

    Reply
    1. Femme Frugality

      They are! Considered sole proprietors. Though if you have any property, especially, starting an LLC can be advantageous to divorce yourself from some though not all liability, especially if they are jointly owned.

      Reply
  3. Rob satrom

    For what it’s worth, isn’t political risk much larger with a w-2 employee now? Here in Minneapolis, employees now have a complex paid-leave policy that needs to be taken into account. Not only that, but with healthcare laws changing every couple years, and the requirements for reporting health care offering, it’s much easier to cut that 1099.

    It’s always funny how entrepreneurs or self employed people are oblivious to the complexities of hiring people. “Self employment taxes? Never heard of em'”

    Reply

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