Business Update Understand the differences between hiring freelancers, contractors and employees TOU

Business Update Understand the differences between hiring freelancers, contractors and employees


Understand the differences between hiring freelancers, contractors and employees

Opinions were expressed by entrepreneur Contributors are their own.

Often, entrepreneurship begins as a stand-alone venture or partnership. But as the business expands, adhering to client demands can be too much for any business owner to accept. This is a really good problem. Unfortunately, not everyone knows when it is time to bring additional help. The simple answer? If you are losing business, you need to make changes. However, depending on your situation, there may be no need to hang the “now recruit” sign. Recruiting employees can definitely help, are they the right kind of help? With an assessment of your needs, you can decide if hiring a freelancer, contractor or employee is right for you.

Basically, the main differences between freelancers, contractors and employees lie in their relationship with the business owner. Freelancers and contractors are self-employed individuals, while employees are hired by the company. Freelancers and contractors usually set their schedules based on their clients’ needs and schedule payments (usually after the job is done). Employees, however, work according to a schedule established by the company and receive regular paychecks on a schedule determined by the company. As a business owner, you are responsible for tax reporting on any salaried employees you have. But since freelancers and contractors are considered self-employed, they are responsible for reporting their taxes.

Sometimes people will use the terms “freelancer” and “contractor” interchangeably, but there is a difference in the professional you are hiring. Freelancers typically work on smaller, shorter projects, while contractors work on larger, longer-term projects.

When should you hire a freelancer?

Before deciding whether to hire a freelancer for your business, it is important to understand exactly what a freelancer is. Freelancers are people whom the IRS considers self-employed, meaning there is no need to onboard them as “official”. Employees are responsible for reporting their earnings and taxes. Since they are not salaried employees no benefit is expected.

Freelancers are generally the best in their field and are passionate about what they do. Depending on the work you do, freelancers can boost your business and potentially save you money. Freelancers are the best option for your business when you need short term help. Consider a relationship with a freelancer if you have the following requirements:

  • You have work that remote employees can do successfully. This saves money on office space.

  • Your current staff lacks the skills to meet a new need. For example, a freelance digital marketer is highly skilled at maintaining a strong social media presence.

  • Your needs are short term. Freelancers are used to working with their clients on fast projects and moving on to their next project. Employees will expect you to provide them with a consistent working relationship.

  • You are not financially ready to hire employees. Employee recruitment comes with the expectation that you will also offer certain benefits as part of their employment. If you are not ready to take that step in your business, a freelance relationship may be a better option to get the help you need.

Related: Here are the benefits of working as a freelancer

When should you hire a contractor?

Freelancers and contractors share many similarities, but they serve completely different purposes. While you can hire freelancers for smaller projects, contractors take on heavier lifting. If your business needs advertising services in addition to maintaining social media accounts, for example, contracting a marketing company to handle the job is your best bet. They come with a team of expert professionals who can get you the exposure you need.

Contractors also handle specialized projects such as IT, remodels, design and consulting. As your business grows, financial advisors can keep you on track with your financial goals. Hiring a contractor will help your business in the following areas:

  • The contractor takes your vision and oversees the project for you. This removes the burden from your shoulders.

  • If you need to do a very specific task that requires a team, contracting the company to do it for you will ensure that the work is done properly.

  • If the work you need to do is not ongoing, you do not need to hire an employee. The contractor will prepare an agreement including the expected time frame for how long the project should run.

Related: Recruitment of Independent Contractor

When should you hire an employee?

Not every company needs employees or a large number of employees. This is an important question to ask yourself, depending on the business you run. Is all your business run remotely with little collaboration? Freelancers can be an invaluable resource. However, if you frequently hold meetings, rent office space, or interact with clients, you may want to ask trusted employees to help with the business.

Remember, finding the right people is important. Just because someone looks good on paper doesn’t mean they are right for your business. They should fit into your company culture. Here are some important considerations when hiring:

  • If you are thin, getting extra help can help you grow your business. With additional support, you can free yourself to focus on the next phase of your company.

  • Since you have complete control over the employee’s workload and schedule, they want some kind of benefit. This can be difficult in the early stages of entrepreneurship, so talk to your advisor about employee retention.

  • Customers, vendors and staff are happy to receive the right kind of help. So, determine if you need help on an ongoing basis and if hiring an employee is right for you.

Related: Ready to hire your first employee? Prepare with these 6 steps

Final thoughts

IRS has its own definition and classification for freelancers, contractors and employees. This gives everyone – and the business owner – a specific responsibility with tax reporting. Talk to a consultant to make sure you understand your responsibilities as a business owner when working with each classified person.



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