Before the 2025 edition of our Business Owner Success Survey, we anticipated that business owners would continue streamlining their operations in 2024 to weather inflation and an uncertain macroeconomic climate, and sure enough the data bore that out. However, one finding stuck out that we hadn’t predicted—18% of respondents said they’ve shifted from hiring employees to hiring contractors, as a way to control costs.
As economic uncertainty continues into 2025, more business owners may consider cutting costs by transitioning from employer to contractor manager—but while contractors are more affordable in the short-term, there are hidden costs to any type of role. Here’s your guide to understanding what’s best for your business, and when to hire contractors versus employees.
What you need to know
- The main difference is their relationship to you: contractors are self-employed and work for their own clients, while employees are employed by and work for you.
- Contractors are cost-effective in the short-term, require less management, and provide specialized work, but also have far more autonomy and less of a stake in company success.
- Consider the long-term impact of cost and risk, how much control you want over your new hire, and the effect of your hiring and company culture on brand image.
What’s the main difference between independent contractors and full-time employees?
When you hire someone to perform a job for your business, you have two main options for defining their relationship to you.
Independent contractors are legally self-employed and work for a rotating roster of their own clients. You’ll negotiate your contractors’ working conditions based on their needs. Full-time employees are employed by, and work exclusively for, you. You have full responsibility for your employees’ working conditions and well-being.
| Independent contractors | Full-time employees |
| They receive minimal or no onboarding or training | They receive full onboarding and training |
| They choose their working hours, use their own tools, and usually work where they want | You choose their working hours, tools, and where they can work |
| You’ll negotiate payment terms as hourly, per period, or per project, for a limited period | You pay them an hourly or salary wage, as set by you, indefinitely |
| They don’t receive employment benefits, and they’ll pay their own taxes | They’re entitled to employment benefits, and you’ll withhold and contribute to their tax payments |
| They have few standing labor rights, so you’ll negotiate terms before signing a private contract | Their labor rights are protected by city, state, and federal law |
Freelancers, gig workers, and consultants
What’s the difference between a freelancer, a gig worker, and a consultant? While they’re each a type of contractor, they vary in their exact role at your company:
- A freelancer is any contractor who works for multiple clients and is paid per item or project completed. They have a high degree of autonomy over their work conditions and can be highly affordable. You’ll hire them independently.
- A gig worker is a contractor who performs a single short task many times—such as ridesharing or delivery driving—and is paid per task completed while assuming many associated risks and costs. Gig work is intended to be short-term and offers flexible working hours and conditions, though certain conditions are managed by you. You’ll probably only hire gig workers if your business is designed around a gig work platform.
- A consultant provides your business with specialized knowledge or skills to help with decision-making, rather than completing tasks. Because of their specialization or credentials, consultants may work longer terms while exercising more autonomy and charging higher (hourly or per-period) rates compared with other contractors. You’ll hire them independently or from a consulting firm.
What it’s like to work with contractors
You can find contractors by browsing or posting to speciality job boards or reaching out to specialty firms. For creative or programming work, you may receive an email from prospective contractors. Some red flags to look out for when screening contractors include poor communication, high upfront payments, and a lack of a portfolio.
Once you’ve interviewed contractors and are ready to extend a work offer, you’ll negotiate the terms of employment, including payment structure, deliverables, deadlines, and working conditions. Once signed, you’ll briefly onboard the contractor, providing them with the information and resources they need to complete the project. Then they’ll get to work.
You may collaborate or check in with your contractor throughout the project to address any issues and monitor progress, as outlined in your contract. You’ll also need a system for managing subcontractor payments to ensure they get paid on time. Once they finish the project, neither of you is obliged to continue your relationship—you can contract them in the future, and they’re free to accept or reject the offer.
Pros and cons of hiring independent contractors
| Pros | Cons |
|---|---|
| Cost-effective: You negotiate wages and don’t have to provide benefits, tools, or a workspace. | No stake: Contractors have little-to-no long-term stake in your success or consequences for negative results. |
| Hands-off: Contractors manage their own taxes and benefits. | Compatibility issues: A contractor may use different tools, which can create communication or operational headaches. |
| Specialized: Contractors can provide experience or skills that might otherwise be hard to find. | Autonomy: You’ll have limited control over how and where contractors’ work gets done. |
Pros and cons of hiring full-time employees
| Pros | Cons |
|---|---|
| Stake: Long-term company success is in employees’ interest, and there should be rewards for good work. | More costly: Employees are entitled to higher wages, benefits, a workspace, retirement plans, and paid leave. |
| Collaboration: Employees have the tools and space to collaborate and create a company culture. | Hands-on: You’re responsible for managing employee payroll, benefits, compliance, safety, and well-being. |
| Control: If necessary, you’ll have control over how and when work gets done. | Commitment: It can be difficult and costly to fire an employee after you’ve agreed to hire them. |
When should you hire contractors vs. employees?
Often, a role is obviously better suited for a contractor or for an employee, but other times things aren’t so clear cut. Here are three main things to consider when you aren’t sure whether to hire an independent contractor or a full-time employee:
Cost and risk
Hiring and onboarding, time-based salaries, benefits (health insurance, retirement plans, paid leave, etc.), and tax-withholding, are expensive but important responsibilities of being a business owner. Hiring contractors for short-term projects can save you a lot of money upfront, but for any long-term value-generating work, the costs of employment should become negligible over time.
If you aren’t sure whether an employee would make a meaningful long-term business impact, hire a contractor. If you need ongoing work, hire an employee, as building a team and culture will help sustain your business. If you’re a startup without enough revenue for an employee yet, consider a round of financing, using a business line of credit or loan, or hiring a contractor until you have the funds.
Control vs. autonomy
Contractors have more autonomy over how they complete their work, while employees are subject to your direction. If you’re a small business, this may not make a huge difference in your day-to-day operations, but regardless of your leadership style, when funds are tight or circumstances are difficult, your ability to adapt quickly will be paramount. If you have a team of employees, it’ll be easier for you to redirect their work processes or conditions, but it’ll be more difficult to scale quickly (up or down). Meanwhile, if you mostly work with contractors, it’ll be easier to scale quickly, but more difficult to redirect their work.
Brand image and company culture
When weighing the cost of hiring employees versus contractors, remember that employees contribute more value than just revenue. A strong company culture that promotes openness and creativity builds momentum for long-term innovation and growth, and reduces employee turnover. Comparatively, contractors’ relationship to your business is more transactional, and they’re unlikely to gather in the same workspace to collaborate in the same way as a full-time team.
Your company culture and hiring practices can directly impact customers’ perception of your brand. For example, customers are more likely to pay a premium to businesses known to hire full-time or unionized employees, or businesses whose employees appear engaged and aligned with a core mission.
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