Understand the differences between hiring freelancers, contractors, and employees

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Very often, entrepreneurship begins as a sole proprietorship or a partnership. But as the business grows, meeting customer demands can be too much for a business owner. This is actually a good problem to have. Unfortunately, not everyone knows when it’s time to provide extra help. The easy answer? If you lose business, you need to make a change. Depending on your situation, however, it may not be necessary to hang a “hiring in progress” sign. While hiring employees can certainly help, is it 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, entrepreneurs and employees lie in their relationship with the business owner. Freelancers and contractors are self-employed, while employees are hired by the company. Freelancers and contractors typically set their schedules around their clients’ needs and establish a payment schedule (usually upon completion of a job). Employees, however, work according to the schedule established by the company and receive a regular salary according to a schedule established by the company. As a business owner, you are responsible for the tax reporting of all your salaried employees. But since freelancers and contractors are considered self-employed, they are responsible for filing their taxes.

Sometimes people use the terms “freelancer” and “entrepreneur” interchangeably, but there is a difference in the type of professional you hire. Freelancers generally work on smaller, short-term projects, while contractors work on larger, longer-term projects.

When to hire a freelancer?

Before deciding if hiring a freelancer is a viable option for your business, it’s important to understand exactly what a freelancer is. Freelancers are people the IRS considers self-employed, which means they don’t need to be onboarded as “officials.” employees. They are responsible for declaring their income and taxes. Since they are not salaried employees, there is no expectation of benefits.

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

  • You have a job that a remote employee can complete successfully. This saves money on providing office space.

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

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

  • You are not financially ready to hire employees. With hiring employees comes the expectation that you will also provide certain benefits as part of their employment. If you’re not ready to take this step in your business, an independent relationship may be a better option for getting the help you need.

Related: Here are the benefits of working as a freelancer

When to hire a contractor?

Freelancers and entrepreneurs share many similarities, but they serve entirely different purposes. While you can hire freelancers for small projects, contractors take on more heavy lifting. If your business needs advertising services beyond maintaining social media accounts, for example, it’s best to hire a marketing company to handle the job. They come with a team of expert professionals who can give you the exposure you need.

Contractors also handle specialist projects, such as IT, renovations, design and consulting. As your business grows, financial advisors can help you achieve 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. It takes the burden off your shoulders.

  • If you need a highly specialized job that requires a team, hiring a company to do it for you will ensure that the job gets done right.

  • If the work you need to do is not in progress, there is no need to hire an employee to do it. A contractor will establish an agreement, including the expected time frame for the duration of the project.

Related: Hiring an Independent Contractor

When to hire an employee?

Not all businesses need employees or a large number of employees. Depending on the type of business you run, this is an important question to ask yourself. Are all your activities carried out remotely with little collaboration? Freelancers can be an invaluable resource. However, if you hold frequent meetings, rent office space, or interact with customers, you will need reliable employees to help support the business.

Remember that it is important to find the right people. Just because someone looks good on paper doesn’t mean they’re a good fit for your business. They should fit into your company culture. Here are some important considerations when hiring employees:

  • If you’re running out of steam, getting some extra help can help boost your business. With the extra support, you can free yourself up to focus on the next phase of your business.

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

  • Having the right kind of help makes customers, suppliers and staff happy. So determine if you need ongoing help and if hiring an employee is right for you.

Related: Ready to Hire Your First Employee? Get ready with these 6 steps

Final thoughts

The IRS has its own definition and classification for freelancers, contractors, and employees. This gives each individual – and the business owner who hires them – specific tax reporting responsibilities. Speak to an advisor to ensure you understand your responsibilities as a business owner when working with each classified individual.


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