January 18, 2022
Employee vs. Independent Contractor: Which is Better for Your Business?

As your business grows and your plate fills up, you may be ready to bring on help. But what does that look like? And how do you know if you should hire an employee vs. an independent contractor? 

This largely depends on what kind of work you’re looking to delegate or the project you need to be completed. To determine the best solution for your business, review the pros and cons of hiring W-2 employees and 1099 contractors below.

What are W-2 Employees?

An employee is hired under an employment contract. The employer is responsible for withholding their taxes, offering benefits and workers’ compensation, and providing equipment and resources necessary for their job. Both full-time and part-time employees complete a W-2 form, which collects essential information like the employer/employee addresses, their social security number, and your employer identification number.

When debating between an employee vs. an independent contractor, remember that W-2 workers are ideal for: 

  • Regular ongoing work that requires a significant amount of time each week.
  • Jobs that require the worker to be on location.
  • Employers that need to dictate when, where, and how the work is done.
  • Jobs that require in-depth knowledge of your organization’s processes and policies.

Recruiting your first team member? Check out these 11 steps to take when hiring your first employee.

Pros of Hiring Employees

Commitment: As long as you treat employees well, they will be motivated to perform well for your business. When you offer great benefits, a positive workplace culture, and work-life balance, you’ll attract and keep the best talent. 

Control & Consistency: As the employer, you dictate an employee’s schedule, responsibilities, and assignments. Employees are there when you need them, and you can have them shift priorities or refocus on projects as required. 

Delegation: As your business grows and becomes busier, you should be focusing on big picture decisions rather than toiling in the day-to-day tasks. You will need help, and hiring employees allows you to remove certain responsibilities from your plate. Eventually, you can do this for other leaders and managers in your company, who will also need support as your organization continues to expand. 

Company Knowledge: If you need someone for a job that requires knowing your business inside and out, hiring an employee vs. an independent contractor can go a long way. You can train employees much more in-depth on the company mission, practices, and policies. And you and your team will be able to build a solid relationship with a new employee faster since you’ll work with them regularly.

Cons of Hiring Employees

Expenses: Hiring talent in-house involves higher costs. In addition to an employee’s wages, you are responsible for paying their taxes, benefits, equipment, and possibly other expenses, depending on the industry and role. 

Legal Requirements: Unlike self-employed individuals, employees are entitled to legally mandated protections. Employers must pay each employee’s social security, medicare, and unemployment taxes. You also need to provide employees with short-term disability and workers’ compensation, among other benefits. 

Time & Management: Internal employees typically need more training to ensure their knowledge and skills are where they need to be. Training is often an ongoing process, depending on the team member’s position. Since they are long-term hires, employees require more direct management and administrative commitment, whereas contractors are autonomous.

What are 1099 Contractors?

An independent contractor is a professional hired to work on specific projects or tasks based on an independent contractor agreement. The employer does not have to withhold taxes or provide benefits–a self-employed individual is responsible for these. Contractors decide when, where, and how they complete their work. Every year come tax season, you will file Form 1099-MISC for each freelancer you’ve paid $600 or more during the year.

Independent contractors are the best fit for:

  • Short-term projects.
  • Work and responsibilities that take only a few hours weekly.
  • Inconsistent work and projects.
  • Jobs or projects that require a specific skill set.

Pros of Hiring Independent Contractors

Specialized Skills & Expertise: The number one benefit of hiring an independent contractor is their extensive experience and knowledge in their respective field. This makes them efficient at solving specific problems or completing certain projects. As a bonus, contractors provide an outside perspective.

Cost-effective: 1099 contractors often charge hourly rates and/or project fees, so you can get a clear idea of how much a project will cost and if it suits your needs. You won’t have to worry about paying employee benefits or taxes or meeting minimum wage requirements.

Flexibility: With a freelancer, you avoid the administrative burden of hiring an employee. You can choose to use the contractor only when you need them, making it easier to budget and adjust projects as company priorities and resources change.

Reduced Legal Risk: Employers don’t have to provide freelancers with most of the protections required for regular employees–which also means less paperwork! Self-employed individuals are not eligible for workers’ compensation or most wrongful termination claims. Ideally, they’ll have their own professional insurance, mitigating legal risk for your business.

Cons of Hiring Independent Contractors

Lack of Control: When you hire a 1099 contractor, you cannot control when, where, or how they complete their work. Unless it is included in the contractor agreement and required for the project, they will most likely not be onsite–meaning you have less oversight of their work. 

Lower Rapport: Since self-employed professionals either work offsite or only visit your workplace occasionally, you won’t develop the same relationship with them as you would with an employee. While you can still generate good rapport with your independent contractors, it may require more effort and time.

Misclassification Risk: It is crucial that employers correctly classify W2 employees vs. 1099 contractors. Some businesses intentionally mislabel workers to avoid paying their benefits and taxes. Companies that try this are subject to hefty penalties from the IRS, possible jail time, and lawsuits from misclassified employees.

When to Hire Employees vs. Independent Contractors

Although there are many employment classifications, employers typically must choose between an employee vs. independent contractor. Which is best for you depends on your business, industry, the job or project at hand, the timeline, and your budget. Consider each factor carefully as you make your decision. Keep in mind that while you may hire a freelancer now, as your organization grows and your needs change, you may want to consider bringing someone in-house for specific roles in the future.

Need some help weighing your options or hiring the right person, whether W-2 or 1099? Contact BlueLion today at 603-818-4131 or info@bluelionllc.com to find out how we can help you complete your team!

The information on this website, including its newsletters, is not, nor is it intended to be legal advice. You should contact an attorney or HR specialist for advice on your individual situation.