When you're trying to form your own team for your business, it can be challenging - it involves intuition, time, and trust. Many business owners face the dilemma of whether to hire full-time employees or contractors. If you decide to go for just one type of employee, you might be missing out on a lot. To find out which type of employment best suits your business, you must know the difference between full-time employees and contractors. This article offers you an in-depth explanation of how these two types of employee’s function.
Hiring Employees vs Independent contractors
It's essential that you clearly distinguish between a full-time employee and a contractor. In short, you'll have to supervise, dictate, and pay taxes with a full-time employee. On the other hand, a contractor provides services to you in return for payment and is independent of your business. Many businesses, large or small, often make the mistake of misclassifying employees, which can result in retroactive payroll taxes, legal fees, and hefty fines.
Within a year's time, you should be able to convert independent contractors into full-time employees. If you're satisfied with the work your freelancer or contractor does, you may want to consider hiring them full-time.
There is no concrete definition in regards to a contractor and a full-time employee, but there are some generally required characteristics for both forms of employment. Let's have a look at these traits.
Who Is A Full-Time Employee?
If your employee working on a part-time or full-time basis needs you to inform them about how, where, and when they perform their tasks, they can be labeled as full-time employees. They are heavily dependent on their bosses. This type of arrangement is generally long-term. As the employer, you will have to continuously supervise the team member, monitoring how they perform their work. When it comes to taxes, you, as the employer, will have to report and pay payroll taxes on the employee. Because of this, the IRS is cautious with employee misclassification.
Who Is An Independent Contractor?
Unlike a full-time employee, an independent contractor operates like a separate business entity. They will provide you a service, and you'll have to pay. Before you begin the project, you'll have to agree on the details and payment and then enter into a contract with them.
After that, you can expect your contractor to:
- Invoice you and get paid according to the agreement signed. Generally, this is done at the completion of the project.
- Work based on a project-by-project basis or a short-term contract
- Provide all equipment and supplies needed for the requested service
- Pay the taxes on the payment made by you. This includes local, state, federal, social security, and even health insurance.
In simple words, an independent contractor is an employee that works for you but is independent of your company or business. After the project is completed, the relationship is terminated.
While many startups have recently started to hire freelancers due to their generally lower rates and the ease that comes with the flexibility that freelancers provide, there are a number of risks associated with hiring independent contractors.
How Does The IRS Decide If Someone Is A Full-Time Employee Or Contractor?
The IRS usually considers the following to determine whether your employees are full-time or contractors:
- Relationship: Do the employee's responsibilities involve making relationships with customers/clients and co-workers
- Financial control: Do you pay payroll taxes? Do you control benefits such as sick days and vacations? Do you decide on salary pay rates?
- Behavioral control: Do you decide the employee’s schedule and method of performing the tasks
If your answer is yes to one or several of these questions, the IRS will classify your employee as a full-time worker.
When Should I Hire An Independent Contractor?
If your project doesn’t require much supervision and has a short completion time, an independent contractor can be the right choice. You’ll have to deal with little long-term obligations, and generally, they are more cost-effective. This is because you'll have to hire independent contractors only when you need them. Independent contractors offer diverse work experiences, and they're up to date on the latest trends and technologies.
Training new workers can require a lot of funds and time, which small businesses predominantly have a scarcity of. In most cases, you might not even possess the skills to train the employee for the required tasks. In such a case, contractors can be highly advantageous as they can offer their expertise for a task in a short time.
Here are some particular scenarios in which a contractor will be the ideal choice:
- Heavy-duty maintenance that requires to be done on an infrequent basis
- If you need someone to help with basic bookkeeping and administrative duties for a few hours every week. These tasks require very particular skills and can be done remotely.
- Assistance with customer service or order fulfillment during a particularly hectic time for your business.
- Software programming, data mining, copywriting, online marketing, website design/development, etc., which require expert competencies.
All these tasks are ideal for contractors.
When Should I Hire A Full-Time Employee?
When it comes to full-time employees, you must make sure that they fit in with your company culture and that they'll be in it for the long run. Of course, you want to fill up a position, but they should also be a good fit. An advantage of a full-time employee is that they foster a sense of fellowship in the workplace. After some time, they’ll feel like they have a part in the company’s success.
In the following scenarios, full-time employees can be beneficial:
- They can help develop relationships. As full-time employees are in-office regularly, they'll have more hands-on knowledge of what's going on with the business in comparison to a contract worker.
- They are also ideal choices for tasks that need close supervision. Full-time employees have daily pre-set hours, and as such, they're more suitable for jobs that require close supervision and timely reporting.
- They are useful for succeeding in local markets. Being full-time employees, they'll already know the target market, and they may also have important contacts that can help with business expansion.
What Are The Cost Differences?
The difference in cost can be significant. It's not mandatory, but with full-time employees, you might have to pay for dental and health insurance, sick leaves, and even vacation time, which can be very expensive for you. On the other hand, with a contractor, you can end up paying as they'll probably be an expert in their field. It's for a shorter term, and generally, they set the price. Depending on your project requirements, you might be able to hire someone outside of your country, which can be cheaper depending on the circumstances. This flexibility can be a huge advantage and a more affordable option.
Which Is More Affordable? Full-Time Employees Or Contractors?
This ultimately comes down to your project and requirements. The best choice could be one of them or even a combination of both. In the end, you must choose one that lets you succeed in the current market while at the same time ensuring certainty for years to come. To do that, you must consider the following:
- Legal liabilities of misclassification
- The cost-benefit of short-term responsibility vs. long-term relationships
- The current and long-term needs of your business
You must deeply scrutinize all these factors before choosing what type of worker you want to hire for your business.
Full-time employees and contract workers both have their advantages and disadvantages and can be extremely beneficial for specific tasks. As a business owner, it's a must for you to examine these differences, consider your projects' requirements, and then choose the right type of worker.