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BFS Capital Blog

Full-Time vs. Contract Employees: Which Makes the Most Sense for Your Business?

October 23, 2014

In many small businesses, hiring employees is a luxury, a sign that you’ve made it to the point that you can pay a little extra so you’re not working for six years without a day off.

In others, it’s a necessity. Because nobody can run a restaurant alone, and running a bar by yourself is, well, running a bar by yourself.

But employees don’t come cheap, and oftentimes bringing in a hired gun is a cheaper, faster way of getting things done. So, what should you do? Here’s a look at things you should consider when determining whether to hire employees or independent contractors.

First Thing’s First: Know the Difference

You saw what happened to The Situation from Jersey Shore, right? Don’t end up like him. Like, in any way, but especially not in the getting-indicted-for-tax-evasion way. And if you don’t know the difference between a contractor and an employee, you might.

Since it’s tempting to contract out your work to avoid paying payroll, Medicare and other taxes, be careful. What you might consider a contractor, the IRS may not, and sadly in that little “difference of opinion” you never win.

So, how do you know? The IRS publishes a list of criteria that define what an employee is, and you can take a look at that right here. The rule of thumb is if a person matches 10 of the 20 things listed here, they’re an employee. Sometimes you can get away with more, but that’s the IRS’ call to make, not yours.

Reasons to Hire Employees

Sure, they cost more. But so do most things in life worth having, and there are some definite advantages to hiring employees.

First, employees bring something you cannot quantify: loyalty. And when someone feels like a vested part of the team, they are going to work harder, with more pride in what they do and an intangible sense of being a part of the organization.

Past that, on a per-hour basis you will – even with additional costs – pay less for an employee. Maybe not for a particular project, but you can get more time out of them for your money, especially with salaried employees .

Additionally, the most talented workers in the job pool are usually looking for full-time employment. You may find contractors who are very skilled and bring a value to your company, but especially when looking for younger workers, the best are going to be the ones looking to come on full-time.

And finally, when you have a full-time employee, that person is a constant for your business. So he or she won’t need to be retrained or re-integrated to the rest of the team, and will be there when workloads increase. So, your variable labor cost when business increases will stay flatter longer.

Concerns to Consider When Hiring Employees

The first – and most obvious – drawback to employees is that they cost more as whole. Not only in terms of salary, but also in terms of stuff like payroll tax, Social security, Medicare, 401k, vacation time, sick days, health insurance, Christmas bonuses and whatever else you decide to give out. Forbes estimated this to be at least 7.56 percent of the total wages you pay an employee, which can add up when your staff gets bigger.

Also, employees have rights that contractors do not. And even if you’re in a right-to-work state, there are situations where firing an employee is trickier than just telling him or her to leave. You also have payments into unemployment insurance if you dismiss someone without cause (layoffs) as well as minimum wage and overtime considerations.

Not that employees are necessarily always a hassle, but you must think if your company’s needs require full-time employment.

Reasons to Hire a Contractor

If your company has specific jobs it needs done, and doesn’t need ongoing help, contractors are your new best friend. Especially if these tasks are not ones that require specific training to your company and can be done by anyone with training in the field – like copywriters, computer technicians, foodservice employees or maintenance workers – contracting will save your company considerable money.

That doesn’t mean you can pay them less. Like we said above, usually contractors are running businesses of their own, and as such they’ll be charging you a fairly high hourly rate. But that’s it – once they’re done, they’re done. And, you don’t have to pay them for downtime or when business is slow.

And all those things we talked about a few paragraphs ago? Like taxes and benefits? Contractors are responsible for that and – depending on your agreement with them – the expenses associated with their job.

Concerns to Consider When Hiring Contractors

Like the converse to employee loyalty, contractors are usually only loyal to themselves. That doesn’t mean they won’t do a good job, it just means they’ll be doing a good job to show they can do good work, not to make your company better. And no matter how good they are, that motivation won’t be as strong as it would with a full-time employee.

Also, from time to time, contractors will need access to secure information and systems within your company to do their jobs. And while we’d like to tell you that everyone is good and honest and would never even THINK of using that information to steal money from you – well, they might. Even if you reset passwords and change access procedures, contractors will know more about your company than most. And changing all that stuff takes time.

You also raise flags to the IRS when you hire a lot of independent contractors. Since the IRS tends to like it when you have employees whose earnings are reported, having a large number of contractors will draw their attention and may lead to an audit.

And finally, as the name might imply everything you do with contractors is contract-based. Meaning they may own the copyrights to their work. They may sue you if they get injured (not your workers comp insurance) and you can’t get rid of them mid-project if dismissal procedures are not specified. Your flexibility is limited, and you will get only what you paid for.

While there is much to consider when debating a contractor or an employee – and we’re certainly not in a position to tell you what’s better for your business -the most important thing is knowing the difference. That way you keep your business as far from IRS scrutiny as you can, and hopefully keep your labor force as lean and flexible as possible.
Image courtesy of Stuart Miles /