Employee Versus Independent Contractor: Which Should You Hire?

Classifying contractors vs. employees

Businesses may choose to hire full-time or part-time employees or take on independent contractors to perform specific functions. 

In simplest terms: 

• Employee: An employee is a permanent member of your company who must be treated in accordance with federal and state labor and employment laws. 
• Independent contractor: An independent contractor operates under a separate business name from your company and performs job functions for you temporarily.

However, classifying someone as an employee vs. a contractor isn’t something you can guess at. The IRS has strict classification guidelines (based on behavior, financing and relationship type) that primarily center on the worker’s degree of control and independence. 

To determine whether a worker is an employee or an independent contractor, ask the following questions: 

• Do they work on company premises? Employees are more likely to work onsite, whereas independent contractors can typically work at any location of their choosing.
• Do they use their own tools? Employers provide employees with the necessary tools and equipment to complete a job, whereas independent contractors are typically responsible for providing their own.
• Are they in control of their schedule for completing work? Employers can dictate their employees’ schedules and work output, whereas contractors have more control over when and how much they work.
• How are they compensated? Independent contractors are typically paid by their output, not their time. Additionally, you are not responsible for paying a contractor’s benefits or employment taxes, carrying their workers’ compensation policy, or withholding their income taxes. 

While control is the primary differentiator between employees and independent contractors, the dividing line isn’t always so simple. You may also have to consider the type of job function being performed in comparison to your specific business trade.

Andy Contiguglia, business risk management consultant and owner of Contiguglia Law Firm, provided an example of how two different job types may be classified for a web design company.  

“A web design company that hires a programmer as an independent contractor is likely to have that person classified as an employee because they engage in the work the business delivers,” Contiguglia explained. “Compare that to the same web design company hiring a photographer to take pictures to be included on a website. The design company and the photographer are engaged in different businesses.”

Another thing to consider when classifying workers is how their classifications might change over time. Contiguglia cautioned that if the IRS or the United States Department of Labor reclassifies a worker from “contractor” to “employee,” you could face steep fines and owe past-due taxes and benefits.

What are the pros of hiring an employee?

Hiring a full-time employee has many advantages. It’s typically the best option for employers who want consistent, long-term team members who are invested in building a strong company culture and achieving your mission. 

Here are some of the most significant advantages of hiring employees:

Employees help build the company culture and mission.

Employees are often immersed in and reinforce your company culture. They’re usually more engaged and motivated to work hard and help achieve your company’s goals and long-term success.

Employees are committed long-term.

Employees should be viewed as long-term investments. Your organization will reap the benefits as you invest in employee training and support their skill development. Employees understand the internal workings of your company, which can also be beneficial in marketing your business. 

“While a contractor might only care about getting the project done and getting paid, a long-term employee may be more willing to exceed expectations and put in extra effort that your business will benefit from for years to come,” said Chane Steiner, CEO of Crediful.  

Employees offer flexibility and adaptability.

Since you have more control over your employees than contractors, you can alter their workload to best fit the needs of your business. If your company suddenly needs to change course, it’s easy to adjust an employee’s tasks or assignments without needing to renegotiate a contract. 

Employees give you more control over operations.

Hired employees create a reliable, consistent team to work on projects as needed. After the initial hiring process, you won’t have to constantly negotiate contracts with new talent or wonder if they’re capable of completing the tasks you hired them for. You can also control your employees’ schedules to ensure that work is produced at the right pace.

What are the cons of hiring an employee?

Although hiring employees has undeniable upsides, you should also be aware of a few potential disadvantages, including the following: 

You’re responsible for an employee’s professional growth. 

Employee retention is a crucial part of managing hired staff. One of the top reasons employees quit is a lack of professional growth opportunities, so helping your team develop their careers is an important responsibility. It’s also critical for your business — as employees build their skills, the quality of their output stays high, and your company maintains its competitive edge.

However, providing employees with the right professional growth resources and opportunities — whether it’s education, certifications, paths to promotion or challenging projects — can be difficult. In contrast, independent contractors are responsible for their own professional development and growth.

Employees are protected by federal and state labor laws.

Employees are protected by several federal and state labor laws. If employers fail to comply, they may face serious legal and financial consequences. For example, if your employees work more than the legally allotted time (typically 40 hours) in a week, you’re responsible for paying overtime wages.

Contiguglia noted that employers must be aware of and abide by various regulations, including: 

• Anti-harassment laws 
• Discrimination laws 
• Family and Medical Leave Act (FMLA)
• ERISA (Employee Retirement Income Security Act of 1974)
• OSHA (Occupational Safety and Health Administration) requirements

“Each of these regulations and laws exposes the employer to additional financial exposure and liability if not properly followed,” Contiguglia added.   

Employees can be expensive. 

Hiring employees comes with several unavoidable expenses. For example, employers are responsible for paying: 

• Wages
• Payroll taxes
• Employee benefits 
• Employment taxes
  Income and unemployment tax (state unemployment tax or SUTA tax) withholdings
• Workers’ compensation insurance
• Overtime pay
• Training expenses

Depending on state requirements and the size of the business, employers may also cover the costs of health insurance, dental and vision plans, retirement contributions and paid leave.

“These expenses are necessary for keeping an employee over a long period of time, and, depending on the needs of a company, full-time employees can be significantly more expensive than contractors,” said Steiner.

What are the pros of hiring a contractor?

Hiring an independent worker as a contractor has its own set of advantages. It’s ideal for employers seeking highly skilled, short-term team members who can perform effectively without supervision or company-provided tools and equipment. Here are some of the biggest advantages of hiring contractors:

Contractors have advanced skill sets.

When you bring on a contractor, you’re hiring someone with the exact skills needed to tackle a specific task or project. The talent pool is often broad and competitive, which can raise the quality of the final outcome. This can be especially valuable if you need someone with specialized expertise for a technical job.

“Instead of having to hire full-time employees who may have to wear many different hats by taking on a variety of tasks, hiring contractors with the expertise to fill a temporary need can be a great way to complete a large variety of work,” Steiner noted. 

Hiring a contractor is a short-term commitment.

Contractor agreements are typically for short-term work, so you’re not locked into a large investment. It’s also easier to dismiss a contractor than an employee. Most independent contractor agreements specify employment at will, meaning contractors can be let go without legal complications. This can be helpful if you hire someone who isn’t the right fit for your company. Your business is also typically not liable for injuries a contractor may sustain while working for you.

Contractors require minimal supervision.

Contractors control their own work schedules, reducing your need to oversee daily tasks. Instead, you can expect them to manage their time and responsibilities independently.

A contractor may reduce employer expenses. 

While you’re responsible for paying your independent contractors their agreed-upon compensation, you don’t have to cover the additional costs and obligations that come with employees, including workers’ compensation, overtime, employment taxes, benefits, FMLA and ERISA.

Still, you may pay highly skilled contractors more than you would an employee. With contractors, you often get what you pay for. Be prepared to offer a higher rate, since they’re responsible for covering their own employment taxes, income taxes and insurance. Experienced contractors know their worth, and undercutting them will likely result in poorer project outcomes.

What are the cons of hiring a contractor?

Although hiring contractors has many advantages, it also comes with potential downsides, including the following:

Contractors may not be loyal or embrace the company culture.

Fostering loyalty and a sense of belonging among contractors isn’t impossible, but it’s not as easy as it is with employees. For example, contractors may not be invited to company-sponsored initiatives like motivational seminars, team-building exercises, celebratory events, or professional development training. Some companies exclude contractors from these activities to maintain clear legal and HR boundaries, which can make contractors feel like outsiders and less invested in the company’s success.

Contractors may have limited product or company knowledge.

Contractors are typically with your company for only a short time, so their knowledge of your business and products may be limited. While they can conduct the research needed to complete a project, they often lack the insider brand understanding that comes from being deeply involved with the company over time.

“If you’re hiring contractors to produce any work that is designed to convey the mission and brand of your company, such as marketing, it may be better to go with a full-time employee who’s more involved with your company, with a better understanding of it as a whole,” Steiner advised. 

Contractors may have inconsistent availability.

Just as you can terminate a contractor at will, they’re also free to move on to the next job with little or no notice. While your employees could technically do the same, contractors are more likely to be actively looking for their next opportunity due to the temporary nature of their work. If a significant portion of your workforce consists of short-term contractors, critical job functions may be disrupted by high turnover and a lack of long-term commitment.

Using multiple contractors can result in inconsistent work quality.

Since independent contractors typically work with you for only a short time, you’ll need to regularly seek out new talent. Each time you hire someone new, you have to get familiar with their output, communication style and ability to manage tasks. While many contractors are highly skilled, there’s always a risk of hiring someone whose work is inconsistent or lacks motivation. Bringing in contractors with varying skill levels can lead to uneven results, which can reflect poorly on your brand.

Contractors vs. employees — which should you hire?

A worker’s legal classification as an employee or an independent contractor depends on several factors, including control, independence and the nature of the work being performed. But once you understand the legal framework, the right choice ultimately comes down to your business’s specific needs.

Consider hiring an employee if:

• You need someone to take on long-term, recurring tasks.
• The role involves ongoing supervision, oversight or integration with the broader team.
• You want to invest in someone who can grow with the company.
• The job is core to your business’s primary operations.
• You’re looking to build company culture and continuity.

Consider hiring an independent contractor if: 

• The work is project-based or short-term.
• You don’t need day-to-day oversight or control over how the work is done.
• The role requires highly specialized or technical expertise.
• The job is outside the scope of your regular business operations.
• You want flexibility without the long-term financial commitment of a full-time hire.

For many businesses, a hybrid approach works best: hiring full-time employees for essential, ongoing tasks and bringing in contractors for one-off or specialized projects. To avoid potential legal or tax issues, always consult a business lawyer or HR professional when classifying workers.