Should I Hire a Subcontractor or an Employee?
Employees and subcontractors each offer different benefits to the entrepreneurs that they work for. The expert you choose depends on your industry, your location and seasonality, the type of work you need to be done, your business needs, and how you plan to grow your company in the future.
If you’re not sure which you should hire as your business expands, read through the pros and cons of each in this resource to help you decide.
What are the pros and cons of hiring subcontractors?
Subcontractors are self-employed workers that you hire on a contract basis. They come with a variety of pros and cons depending on the type of business you have and the industry that you’re in.
Some of the key benefits of working with subcontractors are:
- They are paid for the work that they do instead of being given a salary or hourly wage
- They provide their own supplies, workspace, and tools
- They pay their own taxes, benefits, and vacation and sick time
- They’re often motivated to do jobs more quickly than employees as it maximizes their earning potential
- They’re easy to let go if you’re not satisfied with their work
- You can find a great pool of subcontractors to work with and expand your business quickly
Hiring subcontractors can also have its downsides. Some of the cons of working with subcontractors are that:
- They work for multiple business owners and may not be available when you need them
- They set their wage and hours
- They can turn down jobs as they please
- They have the option to work for clients without going through a contractor, which may turn them into your competitor
- You have little control over the quality of materials, tools, and supplies they use, unless you supply them yourself
Pro tip: use online and paper ads to spread the word that you’re looking for employees and subcontractors. Post a basic job ad, and either boost the posting with an ad, or share the job posting on your social media accounts. Just make sure you’re clear about which type of staff member you are looking for in the ad.
What are the pros and cons of hiring employees?
Employees are staff that you hire to work for you on a permanent basis, regardless of the work that comes in. They can be either part-time or full-time.
The commitment you get from employees is one of the reasons they can be so beneficial in certain roles.
Some of the major pros of employees are:
- You set their schedule, track their time, and control their salary based on their work and schedule
- They can perform ongoing, consistent work, which is great for recurring jobs
- You determine when, how, and where a job is done, and the deadline they need to complete it by
- They can become more familiar with your business practices, clients, and workflow, which gives you more control over customer service and finished product
Pro tip: hiring great employees is key to a successful business and retaining them is just as important. Consider using continuous feedback as a strategy to retain and motivate employees.
Employees aren’t always the best choice, though. Some of the cons of hiring them are:
- Retaining employees can sometimes be challenging in some industries
- They’re paid for the time they spend in-office or on a job, not the work they complete
- You are responsible for deducting taxes from their wage
- You may have to provide paid vacation, sick days, and health benefits, which can be expensive
- They’re harder to let go outside of their probation period
How do subcontractors and employees affect small business taxes?
The main difference between subcontractors and employees in terms of taxes is who is responsible for what.
Business that they work for is responsible for withholding taxes from their employee’s paychecks. As an employer, you’re responsible for providing them with a W-2 form at the end of each year.
READ MORE: 30 small business tax deductions to save money when filing
In contrast, subcontractors are responsible for holding back a portion of their earnings to use to pay their taxes. Contractors in the US must provide subcontractors with a 1099-MISC form (if they paid them $600.00 or more during the year) that the subcontractor uses to provide proof of income to the IRS.
For a more in depth breakdown of employee and subcontractor taxes, read our comprehensive overview.
What businesses are subcontractors best for?
Subcontractors work best for certain types of work and specific industries.
They tend to be a great option for businesses that experience a lot of seasonality, such as:
- Lawn care and snow removal
- Dog walking
They’re also an ideal option when an expert is required for a specific skill but won’t be necessary long-term. This is often the case in industries such:
- General contracting
If you have a business that is affected by seasonality, or you tend to only need specific work once in a while, a subcontractor may be what you’re looking for.
What businesses are employees best for?
Employees work best in businesses that require ongoing, consistent work.
For example, perhaps your business has a lot of paperwork and you need someone in the office to take calls, manage your CRM, schedule appointments, follow-up with clients, and take care of the day-to-day tasks. In this case, you may want to consider hiring an employee to perform these duties.
However, employees who specialize in different trades are also fantastic to have on staff if you’re constantly booking clients in for appointments and need reliable experts to service them.
Hiring employees really depends on what stage your business is at, what work you need to be done, and what your business goals are like.
Hiring the right workers for your business
When trying to choose whether to hire an employee or a subcontractor, focus on what work you have available and how long you need someone to commit to it. If you have a lot of work and it’s going to be ongoing for the foreseeable future (and not just end in a few weeks, or even 6 months when the contract is over), you may want to hire an employee.
If the work is inconsistent and you need someone who knows what they’re doing to come in and complete a task, a subcontractor might be the best fit.
As a home service business owner, you can always hire both depending on the role that needs to be filled. But, for someone just starting out, subcontractors can be a great way to scale slowly and strategically to avoid overstaffing and overspending.