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Employee or Independent Contractor: Who Should You Hire for Your Small Business?

When deciding whether to hire an employee or an independent contractor (such as an independent consultant or freelancer), you need to keep in mind that there are legal and administrative issues tied to each option. Here are some of the things you should consider when making the employee vs independent contractor decision when hiring help for your small business:

Employees (Pros)

Here are some of the reasons you might want to hire traditional employees.

  • When you hire employees (full-time or part-time), you can exercise greater control over them and how they work. For example, you can require that they work on-site during specific hours, and directly under your supervision (or the supervision of someone else).
  • You know that the work is being done directly by the person you hired rather than subcontractors.
  • You can have someone there full-time dedicated solely to your business if you need that.
  • Employees can become more invested in your company and wanting to see it succeed.

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Employees (Cons)

Here are some of the downsides of hiring traditional employees.

  • Hiring employees costs more. You have to pay benefits, a portion of the Medicare and Social Security taxes, workers’ compensation coverage, overhead costs for their working environment, etc.
  • You might need to spend more time training and supervising an employee.
  • There are administration issues to consider – you have to deal with tax withholding for example.

Independent Contractors (Pros)

Here are some of the benefits of hiring independent contractors.

  • You can hire contractors for short periods of time when you need specialized expertise, or you’re not confident that the business growth will yet support a full-time employee.
  • Because they’re specialized professionals who work independently, you don’t need to devote a lot of time to managing and supervising them (you actually can’t micromanage everything they do and how they do it if you want to retain their independent contractor status legally).
  • Contractors are less expensive to hire than employees – for example, they pay most of their day-to-day business expenses, their own taxes, and purchase their own benefits.
  • They can work from their own place of business, so you don’t have to have space available for them.

Independent Contractors (Cons)

Here are some potential downsides of working with independent contractors.

  • You can’t legally control them like an employee – such as where, when, and how they actually get the job done, as long as the job gets done. For example, if you hire a freelance writer, they can choose to do your writing in the dead of night or on weekends if they prefer – you can’t tell them that they have to write for you during certain time frames, using specific tools, and only from your own office. That risks crossing you into employer territory (which comes with increased rights to control things, but also increased financial and administrative responsibilities).
  • They’re free to work for other clients in addition to you. That may very well include competitors or related businesses. For example, if you run a pet store and you hire a freelance copywriter to write the marketing copy for your website, you can’t stop them from writing marketing copy for other pet stores down the line. In very limited circumstances they might be willing to sign a non-compete agreement, but in most cases they won’t. After all, if they specialize in a niche or industry and you try to stop them from working for other clients in that specialty area, again you risk crossing the line into employer territory.
  • You can’t “fire” a contractor the way you can with an employee – you’ve entered into a contract, and are tied to that contract unless they breach it in some way (though you can lay out contract termination terms in the contract to protect both parties).

Before deciding to hire an employee or independent contractor for your small business needs, find out about the legal differences where you live (in the US, for example, the IRS classifies your workers as one or the other). If you don’t find out the rules before making the decision, you might find yourself with heavy penalties down the road that far outweigh the benefits you received from hiring contractors (in other words – never hire someone as a “contractor” if you plan to treat them as an employee).

In what cases do you hire employees? What about independent contractors? Have you experienced other benefits or drawbacks of either? Share your thoughts in the comments below.

This article was originally featured on July 7, 2008. It was updated and revised on its currently-listed publication date.

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