Growing Your Online Business: Should You Hire an Employee or an Independent Contractor?

employee or contractor

Business growth is the goal for any startup and considering that eight out of ten businesses fail in the first year, it is tough to grow your business. One of the most challenging decisions you have to make when growing your business is whether to hire employees or independent contractors.

The short answer is that it will depend on your business. Businesses in different industries have wide variance, and nothing will apply to them across the board.

The best thing you can do is analyze the pros and cons of doing both and see which is most beneficial for your online business.

The Difference Between Employees and Contractors

The first step to knowing who you should hire to grow your business is understanding the difference between employees and contractors. There is an apparent difference that you can know by evaluating their characteristics.

A contractor is typically a freelancer working for their own account or running their own business. The contractor will have their own tools and typically charge a higher rate as they might have employees. Contractors perform a single project at their discretion with an option to renew the contract.

On the other hand, employees are workers who specifically offer their skills and knowledge for the sole benefit of your company. They will sign an employment agreement with a company and typically only have one role in the business.  


There are significant differences in how you will pay an independent contractor vs. an employee. It is one of the main differences between the two workers.

You will pay an employee a wage or salary regularly (monthly or weekly) for their service and time. A pay stub creator will be a valuable tool to outline employee pay and deductions. 

Employees typically get other benefits from an employer, including health insurance and retirement benefits.

You will pay a contractor for the project they are currently doing for your company. They may require a deposit beforehand for the expenses they incur working for you. You will pay an independent contractor only after the job is complete and you are satisfied.

Employees are often cheaper for regular day-to-day operations, but it would be more cost-effective to hire a contractor for large projects. A contractor does not receive company benefits like an employee.

Tax Rates

Another factor that amplifies the difference between employees and independent contractors is taxes. Each has different tax obligations which you have to take seriously, or you might face serious consequences.

The IRS has clear guidelines as to the classifications of workers. You have to clearly state whether a worker is an employee or an independent contractor. 

Having the correct data will help immensely with worker classification and tax reporting.

Tax obligations are more straightforward when you hire an independent contractor. The contractor will file an IRS W9 form which will include the payments you make to the contractor. If you pay them more than a certain amount a year, you have to fill and submit a 1099 form to give to the contractor and the IRS.

When you hire employees, your tax duties are more involved and complicated. The IRS requires you to deduct the necessary taxes from employees’ pay and remit it to the IRS. The employee will typically file a W4 form when you hire them that will have all their tax information.

There are also different payroll tax rates for employees and independent contractors. It will depend on how much you pay your employees, beginning with minimum wage. You also need to know your state’s payroll as they vary from state.

In conclusion, the above points are the main ones you need to consider when deliberating between hiring employees or independent contractors. Each has its advantages and disadvantages. It is up to you to find out which is best for your business.

Cover Image by StartupStockPhotos from Pixabay

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