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The Hiring Dilemma for Many SMB Owners: Should You Hire a Contractor or a Full-Time Employee?

Your business is at the stage where it needs additional help, but as a small business owner, are you better off to hire a full-time employee or a contractor?

The on-demand economy has grown to produce an entirely new fleet of workers – from Uber drivers to Etsy sellers and on-demand business consultants. In fact, Intuit estimates 43 percent of the U.S. workforce will be made up of contractors by 2020.

While on-demand networks may grab the most headlines, it turns out small businesses are turning to contract workers at an increasing rate. In the last year, 30 percent of small businesses using QuickBooks Online in the U.S. interacted with at least one contractor. For small businesses, hiring that first employee can be an intimidating event, which is why turning to contractors can be an effective first step to growing a business.

Contractors give small businesses flexibility compared to hiring a full-time employee. When weighing whether to hire a contractor or an employee, it's important to reflect on your business needs, your relationship with the worker and the amount of time the job or position requires. While the rules for contractors and employees are different, both types of workers can provide the labor you need to scale, grow and thrive.

With that in mind, here are four questions to ask yourself to evaluate which type of worker – contractor or full-time employee – is best for the job at hand.

1. What is the role you are looking to fill?

If the role is important but not central to your business, a contractor could be a good way to start. For example, if you need a graphic designer to create a new logo, you could use a contractor rather than hiring an employee. The job is self-contained and defined.

If the work is more central and critical, such as a cashier in a retail store or a receptionist in an office, and the work performed directly impacts your profits, you may be better off hiring an employee. Employees can dedicate their whole selves to the job for an extended period.

2. Will the individual work only for you?

How much you want the worker to rely on you is another important factor in deciding between bringing on a contractor or an employee. People who work for you as part of their own businesses or who work for themselves would likely have other sources of revenue.

For example, if you have a property-management firm that has a handyman but needs to bring in an electrician for a job, the handyman is an employee while the electrician is a contractor. If you require the person to work for you exclusively, or you wish to put parameters around who else they can work for, you likely want to hire an employee.

3. Will you control the hours the person works?

A big indicator of employment status is how much control you wish to exercise over a worker's schedule. Contractors typically control the time and place where the work is performed. If you would like the ability to set when and where a worker needs to perform the job, then an employee is likely a better fit.

It's also important to consider how regularly you will need work done. Do you need support seasonally, full time, or part time? Full-time workers who work indefinitely for you are typically considered employees, because you are their sole source of income throughout the year. These employees are often on the payroll, whereas contractors can invoice you for the job performed.

4. Will you provide tools and training for your worker?

While you're probably providing all workers with some guidance, the amount of control you'd like to have over them also determines what type of worker to hire. If you have the bandwidth to provide day-to-day training, instruction or supervision, then an employee would be a fit. Contractors often manage themselves and do not require (or appreciate) direct supervision.

The same rule applies to supplies. If you need to supply most or all of the necessary equipment and infrastructure for the work, then you likely should hire an employee. Contractors bring their own tools to the job. For example, a business manager who is an employee would expect you to provide a computer and software necessary to do his or her job, while a freelance business consultant would use their own technology to do the job.

Avoiding classification missteps

Thinking through these four questions and reflecting on your business needs will help you assess what kind of worker you should hire. It may be tempting to classify an employee as an independent contractor because of the relative cost savings that come from not being required to provide benefits. In fact, some businesses misclassify 10 percent or more of their workers as independent contractors. However, there are strict rules surrounding the proper classification of a worker, and there are serious financial consequences when workers are misclassified.

Many small businesses fear making missteps when it comes to worker classification. But by taking the time to evaluate the needs of the business and the type of work that needs to be done, worker classification can be done quickly and effectively. You may even find that hiring a contractor is the stepping stone to bringing on full-time employees to grow your business faster.

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