When the COVID-19 pandemic started, it negatively impacted small businesses across the country. Some had to shut down, while others lost revenue, making it harder for them to keep their employees or pay contractors.
Now that things are slowly returning to normal, some small business owners are having trouble hiring. According to a March 2021 survey by the National Federation of Independent Business (NFIB), 42% of all small business owners reported having job openings they couldn’t fill — a 48-year record high. Health concerns around the coronavirus crisis, low wages, lack of child care, and increased unemployment benefits have all been discussed as contributors to the shortage of workers.
If your small business is struggling to fill a job opening, take a step back to decide whether you need a full-time employee or independent contractor. Both types of hiring decisions come with pros and cons, and the right one for you depends on your unique business goals.
Pros and Cons of Full-Time Employees
- Increased employee loyalty: A full-time employee may be more loyal to your small business, especially if you treat them right and offer them a good opportunity to grow with the company. By contrast, an independent contractor is likely working for multiple clients to achieve their own business goals.
- Better trained staff: Because a full-time worker usually works 30 hours or more for your small business, you have more time to train and develop them. This increases the likelihood that your worker will master skills that are essential to getting the work done effectively and growing the business.
- Greater work scope: You have more control over an employee's schedule and job duties, so you can ask them to perform additional tasks. If you choose to hire a contractor instead, the type of work performed will be limited to what you agree to in their contract and you can’t control their schedules.
- High cost of employee benefits: If you have 50 or more full-time employees, you’ll have to provide health benefits or pay a fine to the IRS. In addition, you’ll be responsible for paying part of the workers’ Social Security and Medicare Taxes (FICA Taxes), unemployment insurance, and worker’s compensation insurance.
- Lengthy training time: Training and developing a full-time employee requires a lot of time and effort. If you don’t have the resources to build up an employee, then choose to hire an independent contractor.
- Decreased flexibility: If you hire a full-time employee, you’ll have less flexibility when it comes to reducing their workload as demand for your services or product decreases. While you could reduce the new hire’s hours, this could cause them to search for a new job.
Pros and Cons of Hiring Contractors
- Lower cost than staff: Since you’re not responsible for paying a portion of a contractor's FICA taxes and other benefits, hiring an independent contractor could be cheaper. In addition, you’ll likely save money on the cost of training — contractors are usually responsible for gaining essential job skills on their own and completing the work with their own equipment.
- Less managerial responsibility: When you hire a contract employee, you don’t have to spend time keeping track of their hours or creating their work schedule. This could free up time for you to focus on setting long-term business goals or managing the day-to-day operations of the business.
- Increased flexibility: By hiring a freelancer, you don’t have to agree to take the ongoing costs of having an employee. For example, you could hire an independent contractor for a one-time project.
- Fluctuations in quality of work: Since a freelancer is responsible for gaining the necessary skills to do work on their own, the work quality you get may vary. They are also likely working with other clients, so they may prioritize someone else’s needs over your own.
- Potentially high turnover: Contractors have less of an incentive to stay with your company than a full-time employee. Because of this, you’ll probably see a higher turnover rate if you hire an independent contractor.
- Less control over workers: If you like having the ability to supervise a worker, hiring an independent contractor can be a risky decision. Providing too much instruction on when and how a job should be done, evaluating work processes (instead of just the end result) and regular training, for example, all indicate a relationship with an employee, not an independent contractor. This misclassification can result in financial penalties from the IRS, including the payment of back employment taxes.
4 Questions To Help Decide Which Is Right for You
Start by weighing the pros and cons above, then review your small business’s short and long-term goals, which can include anything from advancing into new territories or acquiring additional capital. To get the ball rolling, here are some additional questions to ask yourself. Keep in mind that you don’t have to exclusively staff full-time employees or contractors — you can hire both.
Do you need to fill a position for a short-term project?
If you only need someone to complete a short-term project for your small business, hiring an independent contractor makes a lot of sense. You can pursue someone that specializes in the area you need help with the most.
Do you want a dedicated staff member?
You’re more likely to get a dedicated staff member when you hire a full-time employee versus an independent contractor. A worker’s employee benefits usually keep them tied to an employer longer. For example, most employee retirement plans require that an employee stay a certain number of years to vest or qualify for a percentage of the funds a company puts into their accounts.
Do you want to control the scope of work and duties of workers?
If you want to dictate how and when a person does their job, hire a full-time employee. By law, you can’t dictate how a contractor gets the work done.
Will your decision impact any future funding?
While the Small Business Administration (SBA) has a pretty broad definition of what constitutes a small business, you want to be sure the number of people you employ won’t disqualify you from any funding options. For instance, the second draw of the Paycheck Protection Program, offered by the Small Business Administration during the COVID-19 pandemic, was limited to companies with 300 or fewer employees.