Contractor vs. Employee: A Decision-Maker’s Guide to Hiring

For those at the helm of major business decisions, the contractor vs. employee debate is a defining crossroads.

How important is the decision between hiring employees vs contractors? In our opinion, it is critical. This decision will shape the trajectory of your company and also set the tone for its culture, structure, and success.

This isn’t our first rodeo: At Hubstaff, our team comprises a mix of employees and contractors scattered across the globe and working remotely. As a result, we know all about the benefits and pitfalls of bringing a new team member on as contractors or employees.

The market for contract employees is growing: Listings for contract jobs jumped 26% when comparing May to November 2022 to the same period in 2021, according to LinkedIn.

Whether you’re leading a startup or an established business, our exploration of contractors versus employees will equip you with the wisdom needed to make informed choices that align with your company’s vision and objectives.

This article can serve as your guide, offering practical insights and knowledge to guide your decision-making process.

Defining the difference between contractors and employees: a direct comparison 

Running short on time? Here’s the big-picture information that you need to know.

	Contractors	Employees
Payment	Typically paid on a project basis or hourly. Payment structure can vary based on the contract terms.	Usually paid a salary or hourly wage with regular, predictable paychecks.
Benefits	Often lack traditional employment benefits such as health insurance, retirement plans, and paid time off. They may need to manage their own benefits.	Eligible for various benefits like health insurance, retirement plans, paid time off, and sometimes additional perks.
Taxes	Responsible for handling their own taxes, including income and self-employment taxes.	The employer typically withholds taxes, simplifying the tax process for employees.
Flexibility	More flexibility in terms of work hours and project selection. May work for multiple clients simultaneously.	Follow a fixed work schedule and may have limited flexibility, but job security is higher.
Job security	Generally have less job security and may face contract non-renewal or termination after a project’s completion.	Tend to have more job security, often with the expectation of ongoing employment.
Training and development	Typically responsible for their own professional development and career growth.	Often receive training, career development, and opportunities for advancement within the organization.

What is an independent contractor?

Contractors are individuals (or sometimes companies) who work independently and are responsible for their own taxes, insurance, and benefits. Typically, contractors have specialized skills or expertise that businesses need for specific projects.

They often work on a project basis with the contract ending at the conclusion of the project. Contractors also have the right to refuse work, negotiate their fees, and work with a variety of clients at the same time (unless their contract specifies otherwise).

What is an employee?

Employees are individuals who work for a company on a regular basis. They are generally hired to perform specific job duties and are governed by company policies and procedures. 

Employees are usually provided with a workspace, equipment, materials, and training and are paid hourly wages or salaries. In addition, employers are responsible for withholding and paying employees’ taxes, social security, and insurance and must comply with labor laws and regulations.

Employee vs. contractor: Factors to consider

From an employer’s perspective, deciding between hiring an employee or a contractor hinges on several critical factors that can significantly impact the workforce composition and, by extension, the business’ trajectory. 

It’s a decision that transcends mere job titles — it’s about choosing the right workforce composition to propel your business forward. 

Payment

Contractors: Contractors are often paid based on the terms specified in their contract, offering a versatile payment structure ranging from fixed project fees to hourly billing. While this flexibility can be advantageous, it places the responsibility of managing income (including tax obligations and retirement savings) squarely on the shoulders of contractors.

Employees: In contrast, employees typically receive predictable and regular paychecks, whether salaried or hourly. This steadiness simplifies financial planning and budgeting. Employers bear the responsibility of withholding taxes and handling payroll-related tasks.

Benefits

Contractors: Contractors frequently do not have access to traditional employee benefits such as health insurance, retirement plans, or paid time off. Procuring these benefits becomes the contractor’s responsibility, often entailing added costs and careful consideration.

Employees: Employees generally enjoy various benefits their employer provides, including health insurance coverage, retirement plans (like 401Ks), and paid time off. These benefits enrich the overall compensation package and offer a sense of security.

Tax Responsibilities

Contractors: Contractors are classified as self-employed and assume the obligation of managing their taxes. This encompasses paying income tax and self-employment tax and navigating deductions and credits.

Employees: Employees experience the convenience of tax withholding by their employer, streamlining the process. Employers also contribute to Social Security and Medicare taxes on behalf of their employees.

Flexibility

Contractors: Contractors often have more flexibility for work hours and project selection. They can juggle multiple clients simultaneously, granting them autonomy in managing their work. The flexibility and work-life balance that contract work enables is also one of the reasons individuals may seek contract positions.

Employees: In contrast, employees typically adhere to a fixed work schedule dictated by the employer, which may offer limited flexibility. However, this arrangement often provides a higher level of job security and stability. 

Job security

Contractors: Job security for contractors is often more tenuous, with contracts subject to non-renewal or project terminations. This dynamic necessitates a continuous pursuit of new work opportunities.

Employees: In contrast, employees typically enjoy greater job security, with the expectation of ongoing employment contingent on performance and economic factors. However, there are numerous employment-at-will states in the U.S. where employees can be terminated without notice. 

Training and development

Contractors: Contractors are primarily responsible for their professional development and career growth. They must proactively invest in training, buying their own equipment, and skill development.

Employees: Employees often benefit from structured training, career development opportunities, and the potential for advancement within the organization. Employers typically support their growth through well-defined programs.

In deciding between hiring contractors or employees, employers must weigh these factors carefully to align their workforce composition with their business goals and operational requirements.

Pros and cons of hiring employees vs. independent contractors

Choosing between contractors and employees is a pivotal decision that shapes your workforce and your business. Each option has its advantages and disadvantages. Let’s explore the dynamics of hiring contractors versus employees, helping you make informed decisions that align with your business needs. 

Hiring a contractor

Pros

• Flexibility: Contractors provide flexibility in work arrangements and hours, making it easier to adapt to project scope.
• Specialized skills: Contractors often bring specialized expertise, and you can hire them for specific projects that require these skills.
• Cost control: Contract employees are typically paid for specific projects so that you can control project costs.
• Reduced overhead: Contractors are responsible for their benefits and taxes, reducing your overhead expenses.
• Scalability: You can quickly scale your workforce up or down by hiring or releasing contractors as needed.

Cons

• Limited loyalty: Contractors may not have the same level of commitment to the organization as full-time employees.
• Less control: You may also have less control over the work and schedule of contractors, as they often work remotely or independently.
• Project-based: Contractors are typically hired for specific projects and may not be available for ongoing work.
• Legal complexity: Misclassifying contractors can lead to legal issues, so it’s essential to understand and follow labor laws.

Hiring an employee

Pros

• Dedication: Employees often firmly commit to the organization and its long-term goals.
• Team integration: Employees can become an integral part of the team, fostering a sense of belonging and collaboration.
• Consistency: Full-time employees provide consistent, reliable availability for ongoing work.
• Benefits: Employees are typically eligible for health insurance, retirement plans, and paid time off — incentives that can help companies attract top-tier talent. 

Cons

• Higher costs: Employing full-time employees involves higher costs, including benefits, taxes, and salaries.
• Limited flexibility: You may have limited flexibility regarding workforce scalability and project-specific skills.
• Training: Employees may require more training and onboarding, adding to initial costs and time.
• Administrative overhead: Managing employee benefits, payroll, and compliance can increase administrative tasks.
• Legal obligations: Hiring employees comes with legal obligations, such as compliance with labor laws and regulations.

Ultimately, hiring a contractor or employee should align with your business needs, project requirements, and organizational goals.

Key takeaways

Deciding whether to hire a contractor or employee is essential for any business owner. Understanding the differences between contractors and employees and evaluating the nature of the work can help you make the right choice. 

Both types of team members have advantages and disadvantages, so evaluating your business’ specific needs and goals is essential. 

Sometimes, hiring a combination of contractors and employees may be best to achieve optimal results and maximize your business’s efficiency and success.

Utilizing workforce management tools can be an essential component of your business’ success — especially when employing a combination of employees and independent contractors. 

Workforce management software can help you:

• Track time and productivity
• Manage payroll
• Request time off and schedule shifts
• Create invoices 
• Build detailed reports

In navigating this decision, we recommend seeking legal counsel or consulting with human resources professionals to ensure compliance with labor laws and regulations. Your choice should also reflect your unique business needs, and by making an informed decision, you can propel your organization toward a more productive future.