Understanding the Differences Between Hiring Freelancers, Contractors, and Employees

Hiring the right help for your business can be confusing and intimidating
By Entrepreneur
Empowering People in the Business of Changing the World | Entrepreneur® is dedicated to fueling the world’s visionary leaders compelled to make a difference through their innovative ideas, businesses, and points of view.
January 17, 2022Updated: January 17, 2022
Epoch Times Photo
By Lyle D. Solomon

Very often, entrepreneurship starts as a solo venture or a partnership. But as the business expands, keeping up with client demands can be too much for any business owner to take on themselves. This is actually a good problem to have. Unfortunately, not everyone knows when it’s time to bring in extra help. The simple answer? If you are losing business, you need to make a change. Depending on your situation, however, hanging a “now hiring” sign may not be necessary. While hiring employees can certainly help, are they the right kind of help? With an evaluation of your needs, you can decide if hiring a freelancer, contractor or employee is right for you.

Fundamentally speaking, the major differences between freelancers, contractors, and employees lie in their relationship with the business owner. Freelancers and contractors are self-employed individuals, while employees are hired by the company. Freelancers and contractors typically set their schedules based on the needs of their clients and work out a payment schedule (typically upon completion of a job). Employees, however, work the schedule established by the company and receive a regular paycheck on a schedule set by the company. As a business owner, you are responsible for tax reporting on any payroll employees you have. But since freelancers and contractors are considered self-employed, they are responsible for reporting their taxes.

Sometimes people will use the terms “freelancer” and “contractor” interchangeably, but there is a difference in the type of professional you are hiring. Freelancers usually work on smaller, short-term projects, while contractors work on larger, more long-term projects.

When Should You Hire a Freelancer?

Before deciding if hiring a freelancer is a viable option for your business, it’s important to understand exactly what a freelancer is. Freelancers are people the IRS considers to be self-employed, meaning there is no need to onboard them as “official” employees. They are responsible for reporting their earnings and taxes. Since they are not payroll employees, there is no expectation for benefits.

Freelancers are typically the best in their field and passionate about what they do. Depending on the work you need to be done, freelancers can give your business a boost, and potentially save you money. Freelancers are a great option for your business when all you need is short-term help. Consider a relationship with a freelancer if you have the following needs:

You have work that a remote employee can carry out successfully. This saves money on providing office space.

Your current staff lacks the expertise to fulfill a new requirement. For example, a freelance digital marketer is highly skilled at maintaining a strong social media presence.

Your needs are short-term. Freelancers are used to working on quick projects with their clients and moving on to their next project. Employees would expect you to continually provide them with a working relationship.

You are not financially ready to hire employees. Hiring employees comes with the expectation that you will also offer certain perks as part of their employment. If you aren’t ready to take that step in your business, a freelance relationship may be a better option to get the help you need.

Related: Here Are the Benefits of Working as a Freelancer

When Should You Hire a Contractor?

Freelancers and contractors share many similarities, but they serve entirely different purposes. While you may hire freelancers for small projects, contractors take on more heavy lifting. If your business needs services for advertising beyond maintenance of social media accounts, for example, contracting a marketing company to handle the job is your best bet. They come with a team of expert professionals who can get you the exposure you need.

Stock photo of man working at his desktop
Stock photo of a man working at his desktop. (RODNAE Productions/Pexels)

Contractors also handle specialized projects, such as IT, remodels, design and consulting. As your business grows, financial consultants can keep you on track with your financial goals. Hiring a contractor will help your business in the following areas:

The contractor takes your vision and oversees the project for you. This takes the burden off of your shoulders.

If you need highly specialized work done that requires a team, contracting a company to do it for you will ensure the job gets done right.

If the job you need to complete is not ongoing, there’s no need to hire an employee to take on the task. A contractor will draw up an agreement, including the expected timeframe for how long the project should last.

Related: Hiring an Independent Contractor

When Should You Hire an Employee?

Not every company needs employees or a large number of employees. Depending on the type of business you run, this is an important question to ask yourself. Is all of your business conducted remotely with little collaboration? Freelancers can be an invaluable resource. However, if you hold frequent meetings, rent an office space or interact with customers, you will want reliable employees to help support the business.

Remember, it’s important to find the right people. Just because someone looks good on paper doesn’t mean they are a good fit for your business. They must fit into your company’s culture. Here are some important considerations when hiring employees:

If you’re stretched thin, bringing on additional help can help boost your business. With the extra support, you can free yourself up to focus on your company’s next phase.

Since you are in full control over an employee’s workload and schedule, they will want some kind of perks. This can be difficult in the early stages of entrepreneurship, so talk with your advisor about employee retention.

Having the right kind of help keeps customers, vendors and staff happy. So, determine if you need help on an ongoing basis and if hiring an employee is right for you.

Related: Ready to Hire Your First Employee? Prep With These 6 Steps

Final Thoughts

The IRS has its own definition and classification for freelancers, contractors, and employees. This gives each individual—and the business owner hiring them—specific responsibilities with tax reporting. Talk to an advisor to make sure you understand your responsibilities as a business owner when working with each classified individual.