Knowing When to Grow Your Team
Growing your team often comes down to two things: capacity and opportunity. If you regularly turn down work, miss deadlines, or spend more time on administrative tasks than generating revenue, it’s probably time to bring in help. Growth also makes sense when you spot a clear opportunity—expanding services, increasing market share, entering a new market, or improving customer experience—but can’t seize it with your current resources. The right hire, whether an employee or contractor, can help you work smarter, not just harder.
Employee or Contractor?
One of your first decisions will be whether to hire an employee or work with an independent contractor. This choice impacts your taxes, budget, flexibility, and legal responsibilities. The right decision sets your business up for success. The wrong one could lead to unexpected costs—or even IRS penalties.
Working with Independent Contractors
What They Are
Independent contractors—also called 1099 workers—are self-employed professionals who take on specific projects or tasks for your business. They control how and when they work, often serve multiple clients, and use their own tools and equipment. You cannot dictate their daily schedule or exact methods. Contractors may work on one-time projects or provide ongoing services.
How They’re Paid
Payment depends on your agreement. Some charge per project, others hourly, monthly, or a mix. Contractors send invoices, which you can pay via cash, check, card, or ACH. Keep invoices and receipts for at least three years after filing your tax return, or two years after paying the tax—whichever is later.
You do not withhold taxes from contractor payments. They handle their own business expenses and tax obligations, including self-employment taxes. Contractors typically do not receive benefits like health insurance, paid leave, or retirement contributions.
Costs to Consider
Your cost is whatever you agree upon in the contract. If you pay a contractor $600 or more in a year, you must issue Form 1099-NEC.
When It Makes Sense
Contractors work well for short-term needs, specialized expertise, or flexibility without a long-term commitment. They’re ideal for ongoing tasks—such as bookkeeping, marketing, or web development—when you don’t have the time, resources, or staff to manage them internally.
Hiring Employees
What They Are
Employees—sometimes called W-2 workers—operate under your direction. You set their schedules, assign tasks, and provide the tools and resources they need.
How They’re Paid
You decide the pay frequency—weekly, biweekly, semi-monthly, or monthly—and whether they’re salaried or hourly. You must track hours worked per the Fair Labor Standards Act (FLSA) and maintain accurate timesheets showing daily start and stop times, total weekly hours, and any overtime. Paystubs must include pay period dates, hours worked, pay rate, gross pay, deductions, and net pay. In Pennsylvania, you must keep payroll records for three years.
When paying employees, you must withhold federal, state, and local taxes, as well as Social Security and Medicare (FICA) taxes. You’re also responsible for your share of FICA, unemployment taxes, and workers’ compensation insurance. Employees may receive benefits such as health insurance, retirement contributions, and paid leave.
Costs to Consider
Hiring an employee involves more than just wages. Add in payroll taxes, workers’ compensation premiums, benefits, payroll service/software fees, and any tools, equipment, or subscriptions they need.
When It Makes Sense
Hire an employee when the role is ongoing, central to operations, or requires significant training and supervision. Employees can provide long-term stability, deepen commitment to your company’s success, and strengthen your workplace culture. At year’s end, you issue Form W-2 for each employee.
Classifying Workers Correctly
Key Questions
Ask yourself:
- Do I control how the work is done?
- Do I control the financial aspects of the work?
- Will this be a long-term relationship?
Answering “yes” to most means you likely have an employee.
Can I Pay an Employee as a Contractor?
No. If a worker meets employee requirements, you must pay them as an employee. Misclassification can trigger back taxes, interest, fines, and legal action.
While paying someone as a contractor might seem cheaper upfront, it creates serious tax issues. Without proper withholdings, the worker will owe self-employment taxes and any income taxes that should have been withheld. Many misclassified workers file IRS Form SS-8 to determine their correct status, which can lead to the IRS holding your business liable for unpaid taxes, penalties, and interest.
Making the Right Choice
Contractors are best for short-term projects or specialized skills you don’t need daily. Employees are better for ongoing, central roles where you want more control over how the work is done.
Choosing correctly protects your business from costly mistakes and ensures everyone understands the expectations.
If you’re unsure, Ignite can help. Schedule a free, no-obligation consultation to review your needs, discuss tax and financial implications, and choose the best path forward. We also offer budget-friendly payroll solutions to ensure your employees, contractors, and payroll taxes are paid on time, every time.