[This article is a piece of part 11 of our Smart and Simple Guide to Starting a Business - scroll to the end to see the other parts]
As a small business owner you will need to determine whether to hire full time employees or use independent contractors. Don’t make the mistake of thinking they are basically the same thing. They aren’t.
Although you pay both kinds of workers to do tasks for you, they are not viewed the same by the IRS. And if the IRS suspects that you are not classifying your workers correctly, they might audit you.
The IRS defines independent contractors in this way: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
So, if you own a restaurant and hire two waiters, they would be employees. However, if you contracted a local handyman to come in as needed to fix anything minor that breaks in your restaurant, they would be an independent contractor even if you pay them hourly. The waiters show up to your place of business and work under you, while the handyman has his own business and simply shows up and fixes things his or her way.
There are pros and cons to hiring full time employees and independent contractors. Most small business owners wish to avoid the added overhead of having a slew of employees, but some don’t have a choice. You’ll need to evaluate your situation to determine what is best for you.
Advantages to hiring full time employees
When you hire full time employees, they will work for you thirty or more hours a week (fewer hours makes them part-time) and will usually have a long-term commitment to you and your business. The advantages to this type of relationship for you, the employer, are:
- These employees will feel pride in their position in your company. Most people want the security of a job, but they also want to feel the satisfaction of working for a company that they can call home. They want to feel that they are an important part of the team. If you give them that, they may go the extra mile.
- The hourly wage for a full time employee is often much less, because they have job security. If you were to hire out for the same work with a freelancer, you can often expect to pay quite a bit more.
- You don’t need to scramble to find help when your workload increases. If you only rely on independent contractors and need urgent help, your favorite freelancer might be booked. Or it might cost you a lot more to hire one last minute.
- You don’t have to wear all the hats of your business yourself. Instead you can delegate tasks permanently to others. This frees up your time to do the tasks best suited for you.
- You don’t need to continually train staff on how you like things done. Your employees know you and can do the work without the need for continual direction.
- If you want to take a vacation, you can be assured that someone is holding down the fort for you in your absence.
Disadvantages to hiring full time employees
As you consider whether you want to hire full time employees, you’ll need to consider the downside as well. There are certain requirements that come with having employees:
- Although it isn’t mandatory, most full time employees expect benefits, like health care and vacation time. As you interview potential candidates, they will most likely be interviewing with other companies as well, who offer such benefits.
- You’ll need to pay their salaries like clockwork, even if your business has a lull. In order to cover their paychecks, you’ll need to have a reserve of money in your bank account.
- You’ll have specific payroll paperwork that is legally required. Along with this, you’ll need to withhold your employees’ taxes, social security, and Medicare.
- You are responsible for your employees’ training and professional licensing requirements. These vary from state to state.
Advantages of hiring independent contractors
Small business owners usually prefer to hire freelance workers for jobs when they need help. There are distinct advantages to sticking only to independent contractors:
- Although you usually pay more per job or per hour, you will most likely save money overall since you aren’t required to pay them any benefits and do not need to commit to a salary.
- You have greater flexibility. When you work with an independent contractor and it isn’t a good match, you simply don’t hire them again. When you have an employee that doesn’t work out, you may need to fire them, which isn’t always easy.
- You can hire the right person for the task needed, contracting someone with a specialized service. They often have many years of experience, so you don’t need to train them.
- They are responsible for their own permits and professional licenses.
Disadvantages of hiring independent contractors
While hiring independent contractors has many advantages, there are some drawbacks as well:
- You lose some control over how tasks are preformed, because you can’t closely monitor their work. You can guide them, but usually they aren’t on site and will run their business their way.
- They are hired short term, so you might not get the same worker for the next project. They usually operate on a first term, first serve basis.
- They have no sense of company loyalty, but are a hired gun for one specific job. They are not part of your staff.
- They will not promote your brand, but their own. Their work is done under their business name, with their logos, etc.
- All copyrights will be owned by the independent contractor, unless you draft an agreement stating otherwise.
There are times when the line between employee and independent contractor can become blurry. For instance, how do you classify a virtual assistant? In order to answer that question, you must evaluate the situation.
Does the virtual assistant have her own company name, work for you on a project-by-project basis, and operate independently with limited supervision? Most likely, they would be an independent contractor. However, if she works for you forty hours a week and you are her only client, she might be an employee.
Understanding the difference between an independent contractor and a full time employee will save you a lot of headaches in the future. Set up your business with the type of workers that you need for long-term success.
- Part one: Is it time to start up that startup business? and Part 1- Goals, Values and Ideas and Resources for Goals, Values and Ideas
- Part two: Build a winning business right from the start and Part 2: Defining your business concept and Resources for defining your business concept.
- Part three: Funding, Fraternity and Family and Part 3: Ownership, Funding and Family and Resources for funding and ownership
- Part four: The Name Game and Part 4: Naming Your Business and Resources for naming
- Part five: How to Brand your Business on a Budget and Branding: First Impressions Matter and Resources for Branding .
- Part six: Keep Your Friends close and your Competitors Closer and Competitive Research and Resources for Competitive Research
- Part seven:Find Profit in Pricing Your Product Or Service For Your Target Market and Customer and Market Research – Necessary but Overlooked steps for the Entrepreneur and Resources for market research, customer research and competitive research
- Part eight: Getting A Good Fix On Your Costs
- Part nine: How to structure your business correctly: From sole proprietorship to C-Corp
- Part ten: Set Up and Organize Your Space and Tools for Success