Starting a Business: Contractors or Full-Time Employees?

Business.com / HR Solutions / Last Modified: February 22, 2017

Quick guide to the pros and cons of hiring an independent contractor, vs. bringing in full-time employees and staff.

It's not a bad problem to have: You're starting a business, leads are coming in, and you're finally to the point of taking on so much new work that you need help. The question is, do you hire a full-time employee? Or, do you take on an independent contractor?

Both classifications of employees have their benefits and drawbacks, and it's often a difficult decision for you as a small business owner to determine what might be best. After all, your business needs in the short-term might change a year or two from now.

To figure out if hiring a contractor is the best move for your business, or to determine if employing full-time staff is the way to go, consider these 12 items: the pros and cons of hiring contractors vs. full-time employees.

Benefits of Hiring Contractors

PRO: High-speed turnaround.

Contractors work for themselves independently because they have an established, highly-specialized expertise. Typically, they require little to no training in order to be up and running and -- most importantly -- delivering results. Years ago, positions in the areas of design, marketing, accounting and even web development were traditionally reserved for in-house employees, but the work can often be done faster and more effectively with qualified contractors.

PRO: Increased flexibility around project terms.

If you're just starting a business and have a surge of work, hiring an independent contractor offers you the flexibility to complete work as the demands rise and fall with your customers. You're able to take on extra opportunities quickly, and when work levels subside, you're able to save money and control costs by not paying for full-time employees.

PRO: Access to more senior-level talent at a more budget-friendly rate.

Though hourly and project rates for contractors often appear higher than those of full-time employees, these workers are typically available at a reduced rate, after factoring in cost savings of overhead, taxes, and benefits. This allows you to hire a more experienced freelancer than you'd likely be able to afford if you filled the position in-house.

Drawbacks of Hiring Contractors

CON: No right to dictate how the work is done.

Contract employees may not be available all the time, or may not be available during certain times of the week when you need them. Independent contractors enjoy the autonomy of deciding how best to complete the work you've hired them for.  While you may dictate deadlines and desired results, contractors have control over how, where and at what pace the work is completed.

CON: Risk penalties by the government if you misclassify workers.

It's important to know the difference between an independent contractor and employee, and the Small Business Association provides guidelines to help you determine how to classify workers. If you mistakenly classify an employee as an independent contractor and the government determines otherwise, you could face a number of penalties and be forced to pay payroll taxes, interest, workers' compensation insurance and more.

CON: Suffer less integration of work.

A contract worker's activity may not be tightly or thoroughly integrated in the operation of your business activities. Coordinating multiple projects and deadlines can prove to be difficult if a contractor is remote or they are not privy to your overall business goals. Depending on the nature of the work, their deliverables maybe be tied to a certain project, requiring you as the small business owner to apply their work to your overarching strategic efforts.

Benefits of Hiring Full-Time Employees

PRO: Improved workflow.

Having full-time employees once you've established your small business allows you to coordinate projects that tie into strategic business goals. Improved communication allows your team to consider the company's plans, goals, opportunities, and how their work fits into these areas.

PRO: Flexibility in staff resources and abilities.

Often in the world of a small business owner, you must be able to turn on a dime when opportunities arise, or when challenges take you in a different direction. Having in-house full-time employees means you can direct their work, allowing them to experience a variety of tasks, learn new skills and diversify their talents.

PRO: Development of company culture.             

By having in-house staff, you can often establish the tone for your company's culture, which is made up of the attitudes, beliefs, and values of your collective organization. This often lends itself to your public-facing brand, or how people perceive your company.  Company culture is something that distinguishes your small business' offerings from others.

Drawbacks of Hiring Full-Time Employees

CON: Having to provide health benefits.

You may not be in a position where you've established health benefits for your small business yet. Heck, you yourself might be going without. While it's legal to not offer medical insurance, it's is often a necessity when it comes to hiring full-time employees. Not providing health benefits may limit your candidate pool. Many job seekers expect the option to elect health benefits, and once it comes time to sign a contract, it could be a deal-breaker for someone who may have lent significant expertise or assistance to your growing business.

CON: Paying for unemployment.

It's an unfortunate but all-too-common reality of today's economic landscape. If you decide to hire full-time help, and find that, months later, you're unable to financially support full-time staff, you may need to make the tough decision to force layoffs. As a small business employer, you'll then need to make required payments and contributions on behalf of your employees, which include state unemployment insurance.

CON: Having to take on more people-management challenges.

Unless you run a company in the human resources sector, hiring full-time staff is not something that you've likely specialized in. To take on in-house staff, you become more involved in people management issues -- motivation, managing changes, establishing processes, managing conflicting viewpoints, personal matters, and more. All of these items may take time away from the mission critical services your small business offers to customers.

Consider the many pros and cons of both independent contractors and employees. But no matter the direction you decide to go in, a growing business is a good sign. Make sure to consider what you'd like your business startup to look like in six months, one year, and five years from now before taking the plunge one way or the other.

Photo source: new-york-employment-lawyer-blog.com, designpunx.com, stoelrivesworldofemployment.com

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