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A hiring dilemma: Employee or contractor?

One of the best parts of my job is the fact that every single company or organization I work with is in some stage of growth. Expanding programs, increasing revenue, diversifying scope of services – it all means growth and change. I’ve never been one to sit still for very long so thinking about what’s next excites me.

As organizations grow, we realize we can’t do it all alone and need to bring on help. In fact, I am at that point in my own business – anyone looking for bookkeeping work? I am an awesome manager! Back on topic…

How do you know if your business is ready for an employee on your payroll? Or should you just stick with using contractors?

Let’s first go to the IRS for their guidelines. In short, it all comes down to control.

  • Does the company control what and how the worker does her job? You have an EMPLOYEE.
  • Or does the worker control her work process, schedule, and equipment? Does she have multiple clients? This is a CONTRACTOR.

It’s important to ask yourself these questions up front, as the IRS imposes strict penalties for classifying an employee as a contractor (which many small businesses do because it’s a LOT cheaper to hire contractors!).

Unfortunately, even the IRS admits that there’s no magic formula or hard and fast rule about hiring employees versus contractors, so here are a few more considerations:

EMPLOYEES:

  • Much more permanent. This can mean increased loyalty to the company, flexibility to take on more than just their job description, and improved workflow due to less turnover. There is the understanding that the assignment is long term and gives an opportunity to build a solid relationship between employer and employee.
  • Much more expensive. In addition to salary, employers are responsible for paying workers’ comp, unemployment taxes, Social Security, Medicare, and health insurance (and potentially other benefits!).

CONTRACTORS:

  • Increased flexibility. You aren’t tied to a monthly payroll and can hire contractors only as you need them. If the business has a slow month, you don’t have to incur any costs for the contractors or deal with the messy business of letting someone go.
  • Decreased cost. The business owner is not responsible for the contractors’ taxes and benefits, computer equipment, professional development, etc.
  • Decreased control. You don’t have control over the contractor’s schedule, work flow, or pay rates. You may experience more turnover as contractors find other clients or increase their rates.

And finally, what do your FINANCIALS tell you about your ability to hire an employee versus a contractor?

  • Profit margin. Is your profit margin above or below 50%? If it’s consistently below 50% then you might not be ready for the financial responsibility of a permanent employee.
  • Cash reserve. How many months’ operating cash do you have in the bank? If it’s less than three, you might want to reconsider an employee since payroll will need to be run regularly.
  • Revenue. How consistent are your revenue and cash receipts? Do you have months that hover dangerously close to zero? Your business and revenue streams should be well-established and consistent before taking on the responsibility of an employee on payroll.

I hope that clarifies the question on whether to hire an employee or a contractor. Either way, bringing on additional help is a great indicator that your business is growing and thriving!

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