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Should You Hire Employees Or Contractors For Your Startup?

You’re setting up your business the way you want it, from operations to the financial aspects. But, when it comes to hiring people to work for you, there are considerations you need to take into account, such as the necessary job roles that need filling and how long you’ll need them. Also, there are situations wherein you might need to choose between hiring permanent employees or contractors for your startup.

This article will thoroughly discuss both types to help you make wiser hiring decisions. It’ll show you the pros and cons of each of these two options, and it’s up to you to weigh them out. Read on!

  • Permanent Employees 

When hiring permanent employees, it’s essential to assess if your budget can sustain the wages and benefits they’re entitled to. The primary difference between employee and contractor is that the former is under your payroll and must follow specific policies and rules to remain working with you. Employees are given binding contracts containing their job descriptions and the working hours they need to fulfill. 

Here are some of the basics of working with permanent employees:

  • Employees need to adhere to the company’s vision and mission at all times. They’ll work towards your goals and work with the whole team for a seamless and effective collaboration. Full-time employees usually get long-term incentives as well. 
  • A regular working schedule is set for full-time employees, typically eight hours a day, five to six days a week. Thus, you don’t have to guess when they need to work. Also, expect fewer errors on their end, and you can expect earlier or on-time submission of requirements.  
  • It’s your responsibility as the employer to withhold part of the salary for taxes and pay it back to the government regularly. 
  • You also need to provide health insurance to your regular employees, which is one way of making them feel that they’re well taken care of and that you value their presence in your company. 
  • Employee compensation and benefits will likely cost about 30% of the company’s expenses. That’s because they’re also entitled to perks such as several vacation leaves with pay. Salary with benefits can reach up to USD$200,000 per year for a medium-sized enterprise.  
  • As an employer, you ought to provide training to your employees, as well as direct and manage their daily responsibilities. You must also provide constructive feedback, as well as reprimand and sanction employees for breaking company rules. 
  • When it comes to the scope of work, employees tend to have multiple roles when working for a startup. These responsibilities will revolve around similar tasks. For example, IT personnel won’t only be taking care of network security; sometimes, they may also help with customer service.
  • Contractors

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Contractors may have similar roles to full-time employees; however, they’re not exclusive to your company only. They can work independently, decide as to when and how many hours they work, and they typically have their own pieces of equipment. Contractors can also work offsite or from home. 

With contractors, you don’t have to provide long-term salaries and benefits. Thus, you can save money, and, on the workers’ end, they can earn more working for more people.  

Here are some of the facts about working with contractors:

  • Contractors are responsible for paying their taxes.
  • Hiring contractors also means that you need to use IRS forms W9 and 1099. 
  • Hiring contractors can be faster and save you costs because you don’t have to do the customary interviews and assessments to see if they’ll fit your company. You can refer to agencies instead who do the testing of applicants, and they’ll be the ones to refer qualified people to fill job positions for you.  
  • Unlike employees, the services of contractors can be terminated at any time. Your company is also not obligated to follow severance rules when ending a working relationship with a contractor.  
  • You don’t have to pay workers’ compensation insurance to contractors. And, since they work independently, they’re responsible for their retirement insurance. The liability rates and health insurance are significantly higher for self-employed people. Employers can typically get discounts for employees only.  
  • Contractors also have their own equipment and supplies. This can help your company save money as you no longer have to provide such tools for them, although you have the option to give them what they need.  
  • When you’re not sure whether a job position will be long-term, primarily due to an economic crisis that can unexpectedly happen anytime, a contractor can temporarily fill it in. Contractors offer the opportunity for you to assess their skills. In a way, you’re like trying out a person’s skills and work attitude first before fully hiring them.

Which One Is Right For Your Needs? 

When deciding what type of worker you want to hire, whether a regular employee or a contractor, there are considerations you need to take into account to make the process much easier. That said, you can ask yourself the following questions along the way:  

  • What roles does your business need?
  • Is the available job position full-time, part-time, project-based, or seasonal?
  • Do you constantly need people working on shifts, or can you allow them to take vacations off? 
  • Do you need them to work on-site at the office or place of business, or are they allowed to work anywhere as long as they have an Internet connection?

Avoid Misclassifying Your Workers

The workers must be aware of their positions in the company. As the employer, you stand to pay state and federal penalties for noncompliance. You could also face jail time for the intentional misclassification of your workers. One reason could be the avoidance of paying benefits. If a worker gets wind of this misclassification, ensure to heed their concerns to avoid involving the IRS.

To avoid such penalties, you can create a unique contract for the independent contractors you hire. Specify and make the terms and work agreement clear for them to understand. You can choose to state that they’ll be working the same hours as the company. Set the pricing following the result of the deliverables instead of by hours. You might also want to include that the contractor must have liability insurance if the tasks include certain risks.

In Conclusion 

Have you made up your mind yet?  There are no right and correct choices when deciding between contractors and employees for your startup. At the end of the day, it’ll depend on the needs and financial capacity of your business, as well as the risks you’re willing to take.

small business coach