Should You Hire Employees or Contractors for Your Freelance Business?
Freelance business owners often struggle with the question of whether to hire a contractor or an employee. Many claim that contractors are the way to go, hands down; still others have only hire employees and claim they would never do anything different. So, what should you do when faced with this decision? Is there one that is better over the other, overall, or does the “right” choice depend on your type of small business?
When mulling over this decision, it is important to realize that you actually need to consider four simple questions. Answer these questions specifically to your business and you will be better educated and more confident in your choice between hiring employees or contractors as a freelancer.
1. What’s the difference between a contractor and an employee?
This is a big issue for most people because this can be a gray area. The IRS has a simple checklist that you can work through. These facts provide you with evidence of the degree of control and independence you have, and they fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (These aspects include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Basically, will you be controlling the day-to-day tasks of the individual, providing their equipment, and paying them (to include benefits)? If yes, then you definitely need an employee. But if you simply assign tasks and let the person complete work on their own, with their own equipment, and you pay them per task or project, then you have contractor (more than likely).
2. How is business going?
If the answer is “extraordinarily well, but I can no longer handle the work load myself,” then you may want to consider hiring an employee. This employee will belong to you and you alone.
You will be required to train them to your specifications, give them the necessary benefits due to employees according to law (make sure that you fully understand your legal obligations), and make sure that they are fit for the position. By “fit for the position,” I mean to say that the potential employee is not under the influence of any illegal drug, has a clean crime record, and is appropriate morally for the job required. Understand that this person represents your freelance business and can either help or hinder you.
However, if your business is going very well but you can’t justify a full-time employee, you may want to consider a contractor. You can piecemeal projects out to them and pay as you go in this arrangement. Contractors can be more cost-efficient, easier to manage, and easier to fire if you don’t like their work. You can hire one out for a short period of time (i.e. just when business is overwhelming) and finish your business with them when you no longer need their assistance.
The downside of using a contractor is that you lose some of the efficiency gains you might get with an employee. For example, you can train an employee to do tasks a specific way, but you have to let a contractor do the work as they see fit.
3. What is the end goal for my business?
If the answer is “I want to grow my freelance business to become a larger company,” then you may want to consider hiring an employee. In the long run, you are just not going to be able to handle a larger company on your own; you need people to support you. Thus, as you are able, hire employees to do some of the more time-consuming work for you.
Specifically, you may want to hire staff who have a completely different specialty than you, such as accounting or sales.
Specifically, you may want to hire staff who have a completely different specialty than you, such as accounting or sales. In fact, many freelancers benefit from an office administrator who can handle some of the bookkeeping, accounting, human resources, and general day-to-day errands as their first full-time employee.
If your answer is that your business is just experiencing a short-term or seasonal spike, then definitely hire a contractor. In the long run, it will be in your best interest to hire someone that is by nature temporary. You can also bring on contractors for specific issues, such as during tax season.
4. What kind of task do I need an extra person for?
If the job that you need an extra body to take care of is seasonal (like taxes or editing), a contractor will be much more cost-efficient for your freelance business. There are firms who handle these tasks exclusively and can take the burden off of you so you can stay focused on projects that keep your income flowing. These firms or even other freelancers are then only contractors, not employees.
However, if the task is going to be something ongoing, strongly consider hiring an employee. You will be able to train them specifically to your requirements and count on them to do it exactly as you need. You will feel more at ease as a business owner that you have someone reliable and consistent to do what is needed for the business.
For more information on how to handle this issue in the US, the Small Business Administration has an excellent resource for determining the difference between a contractor and an employee.
You should always seek independent financial advice and thoroughly read terms and conditions relating to any insurance, tax, legal, or financial issue, service, or product. This article is intended as a guide only.
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This is a great article!
Using an Umbrella company such as iamindependent.com(IAI) would make hiring Contractors even better!!
This is a good overview, so now let’s look at how this works in real life.
The legal and ethical error made by many small businesses who insist upon contractors for hires is that they want to have their cake and to eat it too.
That is, they demand that they can control your work hours, work location, means of producing the deliverable, etc – but they also want a free pass out of having to deal with payroll bookkeeping, unemployment and workmen’s comp premiums and payments, etc. In summary, they want all of the authoritarian perks of being an employer but they refuse to accept the social and financial responsibilities thereof. This is a pretty common pattern.
Such employers have no business hiring contractors. If you want to control your worker’s output, hours, means of production, etc – you should hire them directly.
Ordinary workers who are considering a contract situation need to consider the legal aspects: if you do not get paid as a contractor, you must generally sue for your wages – the state labor board will not help you because you fall outside its mandate. I have also read many horror stories about businesses that exploit this very fact with their own contractors (including some temporary labor agencies themselves, in the IT services industry.)
Also, the would be contractor needs to understand the potential client’s intentions – are they one of the bad ones who wants to be your “full time boss” but who wants to weasel out of benefits payments by stringing you along as a contractor? Usually the personality type is evident.
Workers must be extremely careful whom they work for as contractors. A middle ground in this is to hire a person through a temporary labor broker (agency, pool, etc.) The person is payrolled properly and the employer gets to utilize them as a temporary employee.
Don makes a very good point.
What he’s describing is the commission of a crime, and that crime is tax fraud. In the United States, the taxing authorities are starting to take an interest in the fraudulent mis-classification of employees as independent contractors. And I seem to recall that one of the tools at their disposal is called “prosecution.”
… but even though technically it is a crime, it’s rampant. An example is the client who hires a contractor or freelancer and bullies them over something such as being available during employee hours. I’ve had several clients who smirked in my face that I was being ridiculous when I stated that they could not “order” me to be someplace while I was working or to do something. Of course, the contractor can always walk… and probably should.
Martha, I can attest to the truth of what you say. I recently was given an opportunity to fill out a sheaf of forms to demonstrate that I was a contractor, not an employee. It felt like an indiscriminate sweep. And I had the feeling that if I was not squeaky clean on my own taxes, they would have come after me. But mine is the strength of 10 because my heart is pure.
And my client is A number 1, too.
As far as I think it depends on the business input and output. If business pertains to specific field where the things are not possible without the help of hiring employee or contractor then it becomes inevitable for the business to hire. But so far as I think in the case of freelance business mostly will do to avoid of hiring employee or contractor and this would happen because of the limited budget and higher demand of employee and contractor. Anyway, enjoyed reading the excellent stuff. A big thanks for the great stuff.
As a person who employs contractors, I think it can potentially be a great idea if done correctly and with wisdom. It allows you to test the waters without the overwhelming commitment of an official employee. In addition, it allows the contractor to pursue other projects. Not all of them want to be tied down to one company (just as freelancers want more than one client). Granted, most of the contractors I work with are other creatives, so they have other projects going on anyway, but when proper work agreements are signed and understood, it almost feels like a collaborative relationship. I dig it.