Pros and Cons of Hiring Contractors vs W2 Employees
The choice to hire contractors vs W2 employees is a difficult one. It's not always clear-cut whether hiring a contractor or employee would be best. In the first part of this post, we will look at reasons you might want to hire contractors, and in the second part, we'll examine potential issues with hiring them.
Why You Might Want to hire contractors
There are a variety of reasons you might want to hire contractors. These reasons will vary by industry, but broadly speaking, they fall into three buckets:
- Your company is small and doesn't have the resources to do everything itself.
- Your company is large and has a lot of customization (i.e., the job needs to be done differently than what's typical).
- Your company does something hazardous, and it may not work out.
Contractors don't require the same resources from you as employees.
It can be particularly important if your business is small or is just starting. Even if you are a more significant business, you may benefit from hiring contractors if your company does something that varies widely from the norm. For example, a company specializing in manufacturing small electronic boards uses contractors for almost all products. They set up viable processes for handling PCBs and don't need workers standing around waiting on work to do.
Contractors are much easier to hire when you need someone to do something one time.
Maybe you want something customized, or your work requires expertise that's difficult to find locally. If you hire an employee, you may be getting help with something that is only recurring occasionally. And if the work is not routine, you'll need to train them, and they will be dependent on you in the future. Hiring contractors is an excellent way to have temporary workers who can perform a task without needing ongoing help. If your company needs a service and will be doing it only once, hiring W2 employees may be the best choice.
You can hire contractors even if you are already an employee of another business.
It is called a job-based contractor, and it's the most common type of contractor you will find. You could hire employees to do certain things when working on projects for another company. It is a great way to get expertise that you can use in your own company.
Contractors tend to be more vulnerable when they start working with you. Even though you will set them up with their tools and equipment, they won't be able to rely on those items forever. They are at the mercy of your company as far as equipment goes, which is a considerable risk. The job may not work out for some reason, and you can decide not to renew their contract. Contractors don't want to be left without the tools they need to make money, so they are likely to work hard to gain those tools.
Why You Might Want W2 Employees
There are also some good reasons you might want to hire W2 employees instead of contractors. If a job needs to be done, again and again, it can make sense to hire a full-time employee rather than a contractor. It is especially true if the job is standard in your industry and easily understood by others. You might also want to hire W2 employees rather than contractors if you are working on something that requires training and experience. You may need workers who can learn as they go along or better communicate with customers and coworkers.
Many companies hire contractors and W2 employees at the same time.
If your company has a massive project that needs workers to be completed, you can hire people to help on that project. Contractors are good for getting people temporarily onto projects, but hiring employees may make more sense if a job is needed on an ongoing basis. It can also help you get all the benefits of a contractor without worrying about them leaving.
Wage laws protect another vital benefit of working with employees. While you can pay contractors more than the going rates for their work, the wages are not taxed. So you'll have less money to pay your workers depending on their hourly rate. It makes employees a better choice for keeping salaries lower.
A Contractor-Based System
No matter which approach works out best for your company, hiring contractors and W2 employees can be essential for operating your business. When you have the right team in place, you can get great results and avoid many of the problems that employees can cause. Chris Elkins has been helping customers hire contractors and W2 employees for a long time. We hope that this post helps you make the best possible decisions about your business situations. If you have specific questions about hiring contractors or W2 employees, please let us know.
Pros and Cons of Hiring Contractors vs W2 Employees
There are tons of information about this out there, and it's not always easy to figure out which option is better for your situation. In particular, there's no clear line between what determines whether an idea is worth pursuing as an employee or a contractor. Many factors can come into account and make one option appear safer than the other.
1. Hiring employees is more expensive than hiring contractors.
If you go to any CRA or government website and ask them how much tax deductions are for an employee, they will give you some number. If you hire a contractor, they won't tell you that. It's difficult to determine how much the average monthly HR cost is for an average company. The reason is that big company take care of all these costs so that it's challenging to get a good number for everyone else. It can cost a company as much as $1000 per month to hire an employee. An average Canadian worker makes around $331500 a year. It leaves the company with $3125 left over at the end of the year or $250 per month. That's not a lot of money to pay for an employee, so many other costs need to be considered.
2. Hiring employees can be a significant risk.
If you hire an employee, they can quit at any time, and you're stuck with them. They could steal your ideas and start their own company. They could make your company look bad and do nothing and suck the money right out of the company. However, most of that risk is gone if you hire a contractor. You can fire them anytime, and their unemployment rate is meager compared to employees. For example, when I hired contractors on the side, I only had one to fire because he didn't do a good job. The rest were all great and provided me with lots of value.
3. Hiring employees is hazardous if you're starting a business.
If you're hiring employees right away, it's hard to know their value and how much time it will take for them to get up to speed. It's difficult to predict if they'll stick around after their probation period and if they will be able to produce results. In contrast, hiring contractors as your first employees is a much easier choice. You can give them all the work that you want, and they will be able to get up to speed very quickly and generate value quickly, while you can adjust your business plan according to how well they do.
4. Hiring employees is easier if you're big.
If you hire employees, it's challenging to hire the right candidate since there are so many applicants. It's also more expensive since your existing employees will want raises, and they might not feel as motivated to contribute their skills if there are many other candidates around. In contrast, hiring contractors is much easier, and you can find many great people suitable for the company. Another thing is that you have to pay for their medical benefits and vacations. With contractors, you don't have to worry about any of that.
5. Hiring employees to get a lot of benefits
When you hire an employee, they will get all sorts of things from the company; medical insurance, dental insurance, paid vacations, etc. You will also be liable for paying for their unemployment when they are not working for your company. They won't get any of those things when you hire a contractor. Some legal benefits are granted to employees. For example, you cannot terminate an employee's employment just because they look different or have a disability. You can do this with contractors, and I've used this against contractors on more than one occasion.
6. Hiring employees will help with future funding.
Another reason why it's better to hire employees because it will make your company look more professional. Investors will feel more comfortable investing in your business if they see that you are competent enough to hire employees. They might not even give you a chance if you're a contractor because of how poorly it looks.
7. Hiring contractors is more flexible for the company.
Since contractors don't get a vacation, there's no reason to take a lot of vacations as the company since it won't help them. It's also easier to stop working with a contractor at any time and replace them. It is good for the company since it can change the way the work is done. For example, suppose the market takes a different direction (genuine estate). In that case, you don't have to worry about firing anyone and can just replace them with a contractor that specializes in that area.
8. Hiring a full-time team can be very expensive.
When you hire employees, they get paid a lot more than contractors. It's easier to hire full-time employees because many people wouldn't want to work as contractors. If you have the budget, it's better to engage them and make them permanent employees. However, if you're in a situation where you need a few people but don't have the money for it, then working with contractors is a good idea.
Here are a few things that you should keep in mind.
If you decide to hire contractors instead of employees, then there are a few things that you should keep in mind.
1. Most companies hire contractors to build an initial team but then don't use them for an extended period. It is a mistake that I see many businesses make. I explained this in an article about deciding how long you should work with contractors and the reason why it's better to have them as full-time employees instead of contractors.
2. Most outsourcing companies will just send you an employee, but if you're looking for a contractor, then treat it like you're looking for a permanent employee. For example, look at their qualifications and make sure they can do the job well. When I hire contractors on the side, I have a few people I trust to send me applications from people they meet or know. I also recommend having someone in the company (maybe your CTO or PM) take some time to interview them before making a decision. If a contractor doesn't have people in their network to use, there's a higher chance of being an employee.
3. You need to make sure that your contractors are paying IRS taxes
I've hired contractors from India, but the companies don't pay their taxes most of the time. It's widespread for Indian companies to not pay their tax on time and even go for a year without spending it. If you run into this issue, you will have a tough time dealing with it. The Indian government won't help you, and the companies you're working with won't give you any advice on dealing with it. If they were working under your company, then there would be a lot more responsibility on your end to make sure that they were paying their taxes.
4. If you're working with a long-term contract, then make sure that there won't be any issues when raising their pay
I made this mistake when I was working with an engineer in India. I wanted to raise his salary, but the company didn't want to do it since they would have to pay more taxes. It's widespread for a company outside of the US (or your local country) to not have time available during the weekends and evenings, so you better make sure that they'll be available during those times. The contractor will get paid overtime when they work during the weekdays, but if you're raising their salary, then make sure that they'll be paid overtime as well.
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