Should You Hire a W-2 Employee or a Contractor?

There are pros and cons to hiring a regular employee versus an independent contractor. Consider your goals and priorities and find the right answer for your business.

Key takeaways

• The pros of hiring a regular W-2 employee include team-building and more supervision and control.
• The pros of hiring an independent contractor include cost savings and greater flexibility. 
• There are legal implications for both, but regular employees require more attention to tax regulations and employment laws.
• Ask the right questions about your business’s current position to determine which option is right for you.

As your business grows, you need additional people to get everything done. You may have carved out the budget for a full-time worker who will receive benefits and be an integral part of your team. But with the influx of workers in the gig economy, you have a lot more options to hire flexible help instead of solely onboarding W-2 employees.

How do you know which is right for you? This guide will walk through the pros and cons of hiring contractors versus regular employees to help you make the right call.

Hiring a regular employee

A “regular” employee means that they work part-time or full-time and receive a W-2 tax form. These individuals are on the standard payroll, and you withhold taxes from each of their paychecks. They often have regularly scheduled working hours and go through the typical hiring and onboarding process. 

Hiring W-2 employees has many benefits for your business and each employee. They will likely receive some kind of benefits, whether health insurance, paid time off, or retirement contributions. Providing people who work for you with these benefits can contribute to employee satisfaction and productivity and build a strong company culture that drives the business. 

Another benefit is that these workers provide more consistent work and will often become masters of the business’s processes and systems. A continuous, steady role means that they may be more confident in ensuring that workflows are smooth and successful. Teams of regular employees can be more synchronized at work.

There are, however, downsides to hiring regular employees. These include:

• There are significant costs associated with benefits.
• Salary expenses add up fast.
• You may have to provide work equipment, like a computer.
• Training and onboarding may be lengthy and costly.
• Hiring a regular staff member is a bigger commitment, which can be a con if they don’t turn out to be suitable for the job.

Care should be taken when hiring a regular employee since they will likely become a crucial part of your team. 

Hiring an independent contractor

On the other hand, hiring an independent contractor can be a wise choice for many businesses. The two primary benefits of going this route are cost savings and flexibility:

• Cost savings: When hiring a contractor, you don’t have to pay for benefits, a regular salary, work equipment, or training. 
• Flexibility: It’s pretty enticing to businesses to be able to hire a professional on a project-by-project basis. You only have to pay for what you need, when you actually need it. 

Another benefit is that independent contractors are often experts in their field. These professionals can usually step in and take on a project without a lot of onboarding requirements. Their business runs on their contracts’ success, so many will be reliable, committed workers throughout the contract period.

There are still drawbacks to working with independent contractors, however. While you’ll likely save money and get more flexibility, you also may not have as much control over what they’re doing. You’re not really their boss or supervisor, and they will be more autonomous than a regular employee. They’re probably working with other businesses as well, which could mean your projects aren’t always top priority.

With independent contractors, you also don’t get those team-building benefits to support a strong company culture as you would with W-2 workers.

The legal and tax implications of who you hire

You will have tax reporting requirements for both regular employees and contractors. However, your obligations will be heftier for regular workers. The company will need a payroll process in place to stay compliant with payroll regulations and tax obligations. You must follow federal and state laws that regulate how they get paid, overtime, workers’ compensation, and workplace policies like anti-discrimination and anti-harassment guidelines. 

There are many more laws and regulations to follow with regular employees than there are with contractors.

With an independent contractor, you will usually gather a W-9 from them and issue a 1099-MISC that reports everything paid. You don’t have to worry about withholding FICA taxes or paying workers’ compensation insurance.

Which option is right for your business?

Choosing an independent contractor or regular employee has both short- and long-term implications. If you still aren’t sure after reviewing these pros and cons, ask yourself questions like the following to further help you decide:

• Is your project ongoing, or is it a one-time or infrequent project? 
• What kind of business budget do you currently have for extra help? 
• Can you afford to pay for a new set of benefits?
• Can you afford to pay a competitive salary for a W-2 employee?
• Can you afford to pay a competitive hourly rate for a contractor?
• How important is team building in your business’s current growth stage?
• Do you need short-term results or ongoing, long-term assistance with a business function?
• Who will be handling training and onboarding? 
• Do you have time to train someone?
• Are you prepared to follow all federal and state employment laws related to W-2 workers with policies and processes?
• Is control over working hours and schedule important to you?
• Do you need to supervise the work being done closely?

Sometimes, the best way to determine which type of worker to hire is to ask yourself which tasks are part of your business’s core services and values. The crucial functions may be performed best by a full-time employee, while less pivotal duties are taken on by independent contractors as needed.

Getting help from a business advisor

Hiring an employee or an independent contractor is a big step, no matter which direction you choose. Ensure you’re making the right choice by discussing your business needs and financial situation with business strategy and tax professionals. 

Contact Provident CPA and Business Advisors to create the right strategy and take the correct tax-planning approach. We will help you minimize your tax burden and set you on the path toward long-term growth by identifying your critical business drivers, helping you build teams, and more.