Employees vs. Independent Contractors

In a guest post over at the Elance corporate blog, I’ve discussed a dilemma: when do you hire employees, and when do you outsource to independent contractors?

One key advantage to independent contractors is that you can get a range of expertise by hiring multiple contractors, instead of a single employee:

An independent contractor is ideal when you need specialized expertise or skills. Often as a small business it is difficult to find and hire subject matter experts as employees.

That’s especially true because small business and growing businesses often have needs for 8 or 10 different skillsets – from bookkeeping to SEO to software development to marketing. But you may not need any of those skills full time.

It would be virtually impossible to find a single employee capable of the level of expertise you need in each of those areas. By hiring several different independent contractors, you are able to get the necessary skillsets, within your budget.

And there are lots of other advantages to hiring independent contractors. Read: When Do You Hire an Employee or a Contractor?

And then let us know: when do you hire contractors, and when do you hire employees? Do you have a rule of thumb?


Anita Campbell Anita Campbell is the Founder, CEO and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses.

12 Reactions
  1. Anita,

    Thanks for the great post.

    Faced with the 2 choices, I definitely go for independent contractors. I’ve had (and still have) 12 people on my biz payroll, and 12 people, IMHO, are headaches 😛

    I’ve been working with independent contractors, and they were awesome, in 2 ways – #1 like you mentioned in your post, they gave you expertise. #2 you don’t have to deal with all the personal issues and lackluster morale and performance of your employees.

    I do have a rule of thumb – Employees are for retailing and office presence, independent contractors are for project-based work.


  2. The issue is also about the know how for the organization. When you need to keep your know how and knowledge, you definitely need your own employees to keep the business secure.

    When you need to make a task with more staff, you should go for the outsourced service.

  3. Agree with Noobpreneur in saying, when do you go independent contractor? Whenever you can as long as you can. There is that little problem of the IRS though. Make sure to discuss all IC relationships with your tax accountant up front least you find yourself buried under interest and penalties should the IRS reclassify your IC as an employee.

  4. Luke, that’s a good point about know how. Many companies don’t realize that if your contractors create original works (logo design, web design, and so on) they own it, not you, unless you get a “work for hire” agreement signed. Most contractors never press the issue and claim ownership, but if they did, you could find yourself losing your logo that you spent tens of thousands of dollars printed.

    Joe, agree, that’s a big gotcha. If you click through the article you’ll see I link in it to the 11-point IRS test for contractor vs employee.

    For both your points, Luke and Joe, a small business owner should discuss the issues with the appropriate advisers (tax and legal).

    And Noobpreneur that’s a good point about project work – contractors are ideal for that.

    Thanks for bringing up these key points!!!


  5. I wrestled with this decision myself Anita-so I am glad to see it addressed here.

    For me, it was a matter of simple cost analysis. 1 project (same skill required) = Outsourcing. 15 projects (same skill required) = Hire!

  6. The IRS is currently working to educate small business owners on this issue with the hope of having those workers correctly classified. The reality is that employees are more likely to pay their taxes.

    However, there are other agencies who will likely look at the structure you choose. Your state unemployment agency is more likely to audit your books looking for incorrectly classified workers, they share that information with the IRS.

    You also have to consider your state’s wage and hour department, the Department of Labor, and your own insurance carrier.

    As for costs savings, good independent contractors understand the math too. They understand the extra costs and responsibility they assume for being independent. They know that they can and should get a higher rate of pay by assuming those risks.

    I always advise clients to look at the facts and circumstances and discuss them with us and then get the opinion of their legal counsel.

  7. WE are a small roof cleaning company in Tampa.
    We ONLY use independant contractors, and pay using a 1099 form.
    We tried using a pay roll company, but they are expensive, and our guys are on piece work anyway.
    At first, our guys hated it.
    But it offers us simplicity, and the contractors several tax advantages.
    It works for us.

  8. Martin Lindeskog

    Here in Sweden we have a service called “hire your employer”. I will search for a text in English and come back.

  9. BTB Management, Sales and Presentation Skills Training Ireland

    Great post, makes a lot of sense.

    Another favourable factor outside the specific levels of expertise that various independent contractors bring to your business is guarantees in relation to delivery.

    If you hire a contractor that doesn’t deliver, you will either not have to pay for their mistakes or indeed at a minimum they can be instructed to go back to the drawing board until they get it right.

    You don’t get anywhere near this same level of comfort with an employee who regardless of the level of performance will always have attached initial hiring and salary running costs.

    If this employee then also underperformers you can then factor the additional firing costs which can make for a very expensive mistake.


  10. Martin Lindeskog

    Have you heard about the concept of “renting your own employer”? It acts as a sort of a reverse job recruitment firm. You have projects to do for a client and then you hire your own employer and this company, e.g., Uppdragshuset (“Assignment House” in Swedish) takes care of all the paper work, pays the taxes, etc. They get a cut of your invoice, around 10% for doing this service.

    I am open for assignments on a world wide basis!

    For more information: http://www.uppdragshuset.nu/eng/eng.htm

  11. I found your collarations very interesting. I am actually conducting a research for my master’s regarding the differences in performance between staff and independent contractors. I am an IC myself on the medical field and I have noticed a much higher level of expertise on my IC colleagues compared to the hired hospital staff. I guess part of it is due to the fact that you are more likely to suffer from the mistakes you make than your staff colleagues. Although I have also noticed a big difference in the way managers treat us. The expectations are always so I that they seem to assume we can do more, faster, ALLWAYS; forgetting that we also need guidance so we do not create problems when working in a solution!

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