Should I hire an employee or contractor?
If you need help building your business, there are two ways to hire an extra set of hands – adding an employee or signing an independent contractor. While there are pros and cons to both, it’s important to understand the difference.
- Employee: An employee is hired to work for your company on a full- or part-time basis. This means you, as the employer, have control over how, when, and where they do their job. And you’ll also have ownership of any work product that’s created on company time. However, this control comes with added responsibility. When you hire an employee, you’ll need to withhold payroll taxes and report their income using the appropriate tax form, in addition to abiding by other federal, state, and local employment laws. Then, there are additional benefit considerations – like offering vacation, sick time, a retirement plan, and health insurance. These are just some of the basic responsibilities that are tied to having employees.
- Independent contractor: A contractor (or freelancer) is a self-employed worker that is hired for a specific task. According to the Internal Revenue Service (IRS), that means the payer only has the right to direct the result of the work – not how, when, or where it’s accomplished. Contractors can also perform work for multiple clients at the same time. When hiring a contractor, you still need to report their income using the appropriate tax form. But because they’re responsible for their own taxes and benefits, you generally don’t need to withhold any payroll taxes.
Contractors can be a great option for short-term, project-based jobs. They can bring a specific skill to the table, without the long-term commitment of hiring an employee.
On the other hand, an employee will give you far more control over the work being performed – and the nature of the arrangement means they’re also likely to be more committed to your business. In the long run, this may make hiring an employee worth the extra time and financial investment, depending on the work that needs to be done.
When is the right time to hire an employee?
Every business is unique. So unfortunately, there’s no right answer to when it’s the best time to hire an employee. Instead, you’ll need to find the right balance for your situation.
- Too early: The biggest challenge to hiring your first employee is typically a financial one. Hire someone too early and you’ll run the risk of encountering cash-flow problems. Or if you don’t have enough work to support another team member, you could be paying someone who doesn’t have enough to keep them busy.
- Too late: However, if you start hiring too late, you may miss out on opportunities to grow your business. Or you could get in over your head and risk disappointing your current customer base.
Either scenario is less than ideal. That’s why it’s important to plan ahead.
Decide in advance when it’s a good time to bring on an employee – like when you hit a certain sales goal, or at a time when an employee can perform work that will significantly increase your revenue. If you need help before hitting that milestone, you can always hire a contractor to test the waters.
What changes do I need to make to my business before hiring an employee?
One big obstacle to hiring your first employee can be the logistics. The truth is, hiring an employee means you’ll have a lot more legal rules to follow1. If you have specific questions about your business, always talk to an experienced lawyer for legal advice.
Generally speaking, though: Before you make your first job offer, you may need to:
- File for a federal employer identification number (EIN). If you don’t have one already, this number will be used for tax documents that are submitted to the IRS.
- Register with the state. Depending on where you live, you may need a separate tax ID number for your state. You may also need to pay your state’s unemployment compensation tax, which is used to support workers if they lose their job.
- Set up your payroll. Whether you decide to manage payroll on your own or work with an outside firm, you’ll need to set up regular pay pe