Should You Hire a Contractor or an Employee? A Business Owner’s Guide

Growing your business is exciting! It often means more clients, new opportunities, and the chance to take some things off your plate. Eventually, you may reach a point where you can’t do everything yourself.

Maybe you need help managing your inbox, keeping up with client projects, handling administrative tasks, or delivering your services. You know you need support, but there’s one big question: Should you hire an independent contractor or an employee? The answer depends on the type of work you need done, how you want to work with that person, your budget, and the rules around worker classification. Let’s walk through what to consider before making your next hire. 

Hiring an independent contractor

An independent contractor is generally a self-employed person or business that provides services to your business. You typically hire them to complete specific projects, provide specialized expertise, or handle certain tasks independently.

Examples might include:

• Hiring a graphic designer to refresh your website.
• Working with a marketing consultant to develop a strategy.
• Hiring a freelance copywriter to write blog posts.
• Contracting with a bookkeeper to manage your monthly financial records.

Contractors generally have more independence in deciding how to complete their work and may work with multiple clients.

Hiring an employee

An employee works as part of your business under an employment relationship. You generally have more control over their responsibilities, schedule, training, and how their work is performed.

Examples might include:

• Hiring an administrative assistant to support daily operations.
• Bringing on a customer service representative to respond to client inquiries.
• Hiring a team member to help deliver your core services.
• Employing an office manager to oversee recurring business tasks.

Employees can be part-time or full-time. Hiring someone for only a few hours each week does not automatically make them an independent contractor.

Important: You cannot simply choose whichever classification you prefer. The actual working relationship determines whether someone is an employee or an independent contractor. Calling someone a contractor or having them sign a contract does not automatically make the classification valid.

Consider the Type of Work You Need Done

Start by asking yourself what you actually need help with.

Are you looking for someone to complete a specific project, or do you need ongoing support as part of your everyday operations?

A contractor may be a good fit when you need specialized expertise, have a defined project, or want to hire an established business to provide a service independently.

An employee may be a better fit when you need someone to take on an ongoing role within your business, follow your processes, receive training, and work under your direction.

For example, imagine you own a consulting business. You might hire a contractor to redesign your website or develop a marketing plan. But if you need someone to answer customer emails every weekday, follow your internal procedures, and work under your direct supervision, an employee relationship may be more appropriate. These are examples, not automatic rules. The details of the relationship matter.

Understand How Much Direction and Control You Need

This is one of the most important considerations.

Ask yourself:

• Do I need to determine when and where this person works?
• Will I train them on exactly how to complete their tasks?
• Will they follow my internal procedures and receive ongoing supervision?
• Am I hiring them to achieve a defined result while they decide how to deliver it?

Generally, the more control your business has over how a person performs their work, the more the relationship may point toward employee status. Independent contractors typically operate their own businesses and have greater independence over how they provide their services.

No single question determines the answer. Federal and state agencies may apply different classification tests, so review the rules that apply to your business before making a decision.

Compare the Total Cost of Each Option

Let's talk about the numbers! When you're deciding whether to hire, it's easy to focus only on an hourly rate or project fee. But the amount you pay someone is only one part of the decision.

Contractor costs

Depending on the arrangement, you might pay:

• An hourly rate or fixed project fee.
• A recurring monthly retainer.
• Additional fees for work outside the agreed scope.

You generally do not run payroll for a properly classified independent contractor. However, you may still have payment reporting requirements, and you should account for the full cost of the services you purchase.

Employee costs

When hiring an employee, budget for more than their hourly wage or salary. Your costs may include:

• Employer payroll taxes.
• Workers' compensation insurance, where required.
• Unemployment insurance contributions, where applicable.
• Paid leave and other required benefits, depending on the applicable laws.
• Payroll processing and administrative costs.
• Recruiting, onboarding, training, and equipment.

Not every cost applies to every business or employee, so make sure you understand your specific obligations.

Look at Your Cash Flow Before You Hire

Before bringing someone on, take a look at your financial reports.

Hiring creates a financial commitment, and you want to make sure your business can support it without putting unnecessary pressure on your cash flow.

Here are a few questions to consider:

• Is my revenue consistent? Do you have reliable income, or does your revenue fluctuate significantly from month to month?
• Can I afford the ongoing expense? Look beyond your current bank balance and consider upcoming bills, taxes, debt payments, and other commitments.
• Will this hire help generate more revenue? Could the additional support free up your time to serve more clients, take on larger projects, or focus on business development?
• What happens during a slower month? Would you still be able to cover the cost if sales declined temporarily?
• Have I accounted for the full cost? Include employer taxes and other employment expenses if you're hiring an employee.

A profit and loss statement can help you understand your revenue, expenses, and profitability. Your cash flow reports and bank balances can help you evaluate whether you have the money available to meet your obligations.

Remember, a profitable business doesn't always have plenty of cash available. Reviewing both profitability and cash flow gives you a clearer picture before making a hiring decision.

Think About Your Long-Term Business Goals

Your next hire should support the business you're building, not just help you get through a busy week.

If you need occasional expertise, a contractor may give you access to specialized skills without creating an ongoing employment role.

If you're building a team, expanding your service capacity, and developing consistent internal processes, an employee may be a better fit.

Consider what you want your business to look like in the next year or two.

Do you want to spend more time serving clients? Do you want to step away from daily administrative tasks? Are you hoping to build a team that can help you grow?

Your answers can help you identify the type of support you need. Just remember that your preferred working arrangement must align with the applicable worker-classification rules.

Make Sure You Understand the Classification Rules

This is an important step before you make an offer or sign an agreement.

The IRS considers the overall relationship between a business and a worker, including behavioral control, financial control, and the nature of the relationship. State agencies may use different tests.

If your business operates in Oregon, worker classification deserves particular attention. Oregon agencies do not all apply the same criteria, and a contract or Form 1099 alone does not establish independent contractor status.

Before moving forward:

• Review the applicable federal and state requirements.
• Confirm which payroll, tax, insurance, and reporting obligations apply.
• Speak with an employment attorney or qualified tax professional if you're unsure how the rules apply to your situation.

You can find additional guidance in the resources linked below.

Your Hiring Decision Checklist

Before making your next hire, take a few minutes to answer these questions.

• I have clearly identified the work I need help with.
• I understand how much direction and supervision the role requires.
• I have considered whether the working relationship supports contractor or employee classification.
• I have estimated the full cost, not just the hourly rate.
• I have reviewed my financial reports and cash flow.
• I understand the tax, payroll, and compliance requirements.
• I have considered how this hire supports my long-term business goals.

If you're still unsure, that's okay. You don't have to figure everything out overnight. Taking the time to evaluate your options now can help you make a more confident decision.

A Final Thought: Let Your Numbers Help You Decide

Hiring can be an exciting milestone in your business, but it should be a thoughtful financial decision, too.

Understanding your revenue, expenses, profitability, and cash flow helps you see what your business can afford and where additional support might make the biggest difference.

At Take It Easy Bookkeeping, I believe your numbers should help you make informed business decisions, not leave you feeling overwhelmed. When you understand what's happening financially, you can plan for growth with more clarity and confidence.

Thinking about bringing on your first team member or contractor? Start by reviewing your numbers, identifying what you need help with, and making a plan that supports your business goals.

Take it easy. You don't have to figure it all out at once!

Helpful Resources

• IRS: Independent Contractor (Self-Employed) or Employee?
• Oregon Bureau of Labor and Industries: Employee or Independent Contractor
• State of Oregon: Independent Contractor Information

Disclaimer: This article is for general educational purposes and is not legal, tax, or employment advice. Worker classification depends on the specific facts and applicable laws. Consult a qualified professional about your circumstances.