Should You Hire an Employee Or a Contractor? (& How to Hire One When You're Ready)

So you know you want to bring on extra help, but what kind of help does your business need? The decision to hire an employee vs. a contractor isn't one to take lightly. You have to consider all sides to determine what your business needs, who you want to work with, and how much you want to integrate this person into your team.


Here's how to decide between an employee or a contractor and how to hire when you're ready.


The Difference Between an Employee And a Contractor


The way you bring on outside help will determine both how you handle your finances and how much control you have over the person you've hired. The IRS has three categories with which they determine whether a person is an employee or contractor:

  • Behavioral Control, meaning when, where, and how this person does their work for you.

  • Financial Control, meaning who gets to set this person's rates and determine their pay.

  • Type of Relationship, meaning what each party brings to the table.

Before you ever start the hiring process, consider whether you want to bring on an employee or a contractor. Let's break down the differences!


What Is An Employee?


An employee is someone you hire under the conditions that you'll get to decide when, how, and where their work is done. For example, you'll get to tell them which hours to work each day, where that work should be done (on location or remotely), which programs they'll use to complete the work, and the exact steps they'll take to complete the work.


While it might sound great to have that level of control, hiring an employee requires a higher level of responsibility on your end. You'll most often need to provide benefits (like health insurance), equipment (like their computer and software), and training (both initial and ongoing). You provide the tools, they provide the labor. It's a give and take!


If you're looking for a long-term team member you can train on your own systems and fully integrate into your company, you might want to hire an employee.


What Is A Contractor?


Unlike an employee, a contractor is in total control of their own work. Most of the time, they're already well-versed in their area of work. This means they usually have their own systems in place and will require minimal training on your end.


A contractor gets to decide when, where, and how they conduct their business. You ask them for deliverables, and they deliver them. You don't always get to see "how the sausage is made," but with a great contractor, you don't need to!


Because you have less control over how they work, you also have less responsibility for them. That means you don't have to provide benefits, extensive training, or equipment. A contractor is a business owner themselves, and they handle their own taxes and systems.


If you're looking for an expert to jump in on a project or deliver specific items regularly without the expectation of providing benefits, you might want to hire a contractor.


How to Hire an Employee or Contractor


Once you've decided what kind of help you want to bring on, it's time to hire!


Hiring an Employee


Here's how to hire an employee:

  1. Interview. Create a detailed job description for the role, and post it on hiring sites. Interview applicants and pick someone with good references who seems like a good fit for your company and work style.

  2. Choose a payroll provider. Trust me, you don't want to run payroll yourself. Choose a full-service provider like Quickbooks to run that system for you.

  3. Complete documents. Have your employee complete all the necessary documents during their first day with you. This is usually a W-4, an I-9, and any state-required documents.

  4. Onboard with your payroll provider. Get those documents to your payroll provider so they can properly onboard your employee and start paying them.

  5. Create a payment schedule. Decide how often you'll pay your employee, and communicate that schedule with your employee.

  6. Train them. Teach them your systems, your programs, and anything else they need to know about the job. Remember, this is an ongoing process. Great employers provide training throughout their employee's time with them.

  7. Pay taxes. You'll be required to pay taxes for you employee, but a full-service payroll provider can do that for you. Just keep in mind when those taxes are due and how much you're paying.

  8. Get to work! A solid employee can become a valuable member of your team. Just be sure to treat them well and respect their time.

Hiring a Contractor


Here's how to hire an independent contractor:

  1. Look around. Meet several different contractors in the field, and find one who both knows what they're doing and feels like a good fit for your company. Even though they won't be an employee, you want someone you can work well alongside.

  2. Sign contracts. Read their contract thoroughly, and provide your own as well. This will make sure both businesses are protected and get what they need out of the relationship.

  3. Collect a W-9 and file a 1099. When you start working together, collect a W-9 from your contractor. The following January, you'll need to file a 1099 with the information from that W-9. (Check out efilemyforms.com or tax1099.com to file your forms!)

  4. Decide how to pay them. Most contractors will invoice you through their payment processing systems, but some will ask that you set up payment. Either way, be sure you have the proper systems in place to pay them on time.

  5. Get to work! An independent contractor is an amazing resource for your business. Ask them questions, seek their insight, and nurture the relationship.


Not sure which kind of help you can afford?


You're in luck! With my Gain Financial Clarity guide, we'll dig deep into your business, how much you're really making, and what you can afford to invest in. Click here to download it for free!


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