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Will Contractors or Hiring Staff Benefit Your Small Business Most?


ASK   SCORE. SCORE, Counselors to America’s Small Business, Free Business Counseling

As your small business grows, you will find you can’t do everything on your own. To obtain the help you need, you can choose to outsource tasks to independent contractors or hire employees to whom you can delegate work. 

To decide which will make the most sense for your company, it’s important to first understand some of the key differences between working with independent contractors versus having employees on staff. 

Employees Vs. Independent Contractors: Four Points Of Comparison

• Compensation

Independent contractors who do work for you operate under their own business names. They are not on your payroll, and they will issue you invoices for their services rendered—typically based on an agreed upon flat fee or a per hour rate. With employees, you provide regularly scheduled paychecks that reflect compensation according to the salary or wages you agreed to pay them. 

• Tax Withholdings

With hired employees, you withhold their federal, state, and local taxes from their paychecks—and you’re responsible for submitting those tax payments to the tax authorities. Independent contractors, on the other hand, must submit their own federal, state, and local income tax payments—including self-employment taxes (Social Security and Medicare/Medicaid)—to the tax authorities directly.

• Company Benefits

When you have employees, you may be required by law to provide certain benefits, such as offering medical insurance, paying half of the employee’s Social Security and Medicare tax obligation, workers compensation insurance, and family and medical leave. You are not, however, required to provide benefits to independent contractors. 

• Management Of Work

With employees, you have more control over how work is done, when it’s done, and where it’s done. With independent contractors, you can’t dictate their hours, the equipment they use to perform their work, or tell them how to do their work. 

Which Should You Choose?

That depends. Using independent contractors might save you some money on labor costs, minimize liability, and give you more flexibility if you choose to discontinue your working relationships. On the other hand, hiring staff gives you more control over the skills development of your employees and you call the shots on how, when, and where work is performed. 

If you choose to sign on independent contractors to help you with your work, make sure it’s clear they are not employees. Consider having them sign an Independent Contractor (or Work For Hire) Agreement and request they sign a W-9 (Request for Taxpayer Identification Number and Certification) form to identify them as a contractor. 

As you’re making the decision to hire staff or contract an independent worker, consider asking for insight and guidance from legal and accounting professionals. Mentors at your local SCORE chapter could also help you weigh the pros and cons of each option so you can better determine which will best serve the current needs of your small business.

Further advice is available from SCORE, a nonprofit association offering a wealth of information resources, training, and free counseling designed to help entrepreneurs nationwide build productive, profitable businesses. 

A SCORE Counselor can serve as a sounding board and will provide valuable unbiased feedback on how to improve things. The SCORE Counselor can also look at the business from the perspective of a bank or other investor, and raise questions you may have overlooked.

All SCORE counseling is offered as a free and confidential community service. There are 30 counselors in the Grand Rapids office of SCORE. Call 616-771-0305 for an appointment with a knowledgeable counselor or e-mail us at score@grandrapids.org.  

Free and Confidential Counseling

SCORE, 111 Pearl Street NW

Grand Rapids, MI 49503

616-771-0305

www.grandrapids.score.org

e-mail: score@grandrapids.org

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