Introduction
Business is thriving, and you’re ready to hire more help. Should you find a new employee or look for a contractor? The answer is complex and has large financial implications, as both options come with distinct costs and benefits.
Ultimately, the choice between an employee and a contractor depends on factors such as the nature of the work and your organization’s goals. However, understanding the financial aspects can help you make a better decision.
Read on to gain insight into employees vs. contractors and discover which is more expensive.
What Is the Difference Between Employees and Contractors?
The main difference between employees and contractors is that an employee works for you directly, while a contractor typically works for themselves or their own company.
You control what your employee does and how they do it. Their day is entirely shaped by company policy. On the other hand, contractors work independently. They decide when and how to complete tasks, and you have a limited say in what they do.
Contractors are also known as freelancers or consultants. If a contractor is hired for an extended period, they may be referred to as interim staff members.
What Are the Costs of Employees?
There are several costs associated with hiring employees.
The most significant cost is wages, often supplemented by benefits like health insurance and paid vacation time. Additional costs include:
- Hiring bonuses
- Recruitment fees
- Training and onboarding expenses
- Payroll taxes
- Workers’ compensation contributions.
You may also have to pay severance or other related costs when terminating an employee’s contract. According to the U.S. Bureau of Labor Statistics: “Employer costs for employee compensation for civilian workers averaged $43.26 per hour worked in June 2023… Wages and salaries cost employers $29.86 while benefit costs were $13.39.”
What Are the Costs of Contractors?
Contractors typically have higher hourly wages than employees. This is because they are paid for individual projects or tasks and can charge a premium for their expertise. Additionally, the higher wage helps compensate for the loss of benefits.
The cost of hiring contractors varies widely by specialty and experience. However, the average rate for an American freelancer in 2023 was $64 an hour. Unlike employees, contractors are not subject to payroll taxes or workers’ compensation contributions.
Other costs associated with hiring contractors may include:
- Recruitment or onboarding fees
- Performance bonuses
- Travel expenses
- Temp agency fees.
Overtime fees may be a factor as well. This pay is not legally mandated as it is for employees, but it may be negotiated in the contract.
Which Is More Expensive: Employees or Contractors?
At first glance, it may seem like good contractors are more expensive than employees. However, this is not necessarily the case. The cost of an employee or contractor depends on many variables, such as experience level and the scope of work.
For short-term projects or tasks, contractors can be more affordable because they are not subject to payroll taxes or benefits costs. There may also be less onboarding as the contractor only needs to know the details of a single project.
However, an employee may be more cost-effective for long-term positions requiring specialized skills. Employees can benefit from training and development, which can help them become more valuable over time. They’re also available to work on multiple projects at once without a rate adjustment.
Final Thoughts
The choice between hiring employees or engaging contractors cannot be whittled down to a purely financial decision. Employees offer stability, integration, and control. In contrast, contractors provide flexibility, reduced overhead, and specialized skills.
The “more expensive” option depends on your perspective and the specific circumstances of your business. Try to carefully evaluate your needs and resources before making a decision. What will your new hire be responsible for? Do you have the resources to train them long-term? How much of an upfront investment are you willing to make?
Consulting with financial professionals like Kondler & Associates, CPAs, can help you answer these questions so you make the best choice for your business. Our team of experts can explain the nuances behind finances for employees and contractors and help you determine which is more expensive. Contact us today to find out how we can help!
