Employee or Contractor: The Pros (and Cons) of Each

April 13, 2024

It can be challenging to ensure productivity when managing a business. Should you hire a traditional employee or hire a contractor? This can be a tricky question. Both employees and contractors work for your business, but there are important differences that affect both you and the worker. Businesses must weigh the pros and cons of hiring employees versus contractors when deciding on the workforce structure.

Employees: W-2 Workers

Employees are the backbone of many businesses. They perform various duties and tasks under an employer’s direct supervision and control. These individuals receive regular wages or salaries, typically paid biweekly or monthly. 

Employees receive a W-2 tax form from their employer at the end of each year. This form reports the employee’s total earnings and the taxes the employer has withheld. 


Company Control

Employers exercise significant control over employees’ workday. This includes setting schedules, assigning specific tasks, providing necessary tools and equipment, and directing work. This level of oversight ensures alignment with the company’s methods and goals.

Investment and Loyalty

Companies invest in employees through training, professional development, and benefits such as health insurance, retirement contributions, and paid time off. This fosters a sense of belonging and encourages long-term commitment, building a loyal workforce invested in the company’s success.

Simplified Tax Handling 

Employers are responsible for handling a significant portion of employees’ tax obligations. Income taxes, Social Security, and Medicare are withheld directly from paychecks, and employers contribute a share of payroll taxes. This simplifies tax filing for both the employee and the business.


Ongoing Costs

The cost of employing staff extends beyond salary alone. Businesses incur substantial expenses related to benefits packages (e.g., health insurance, retirement, paid time off, etc.), payroll taxes, workers’ compensation insurance, and other potential perks or mandated contributions. These ongoing costs must be factored into the overall budget.

Administrative Burden

Managing payroll and benefits, tracking time off, and ensuring compliance with employment laws can be time-consuming and complex, adding to administrative overhead.

Hiring Difficulties

Finding, interviewing, and hiring the right employees can be costly and take a lot of time, especially in a competitive job market.

Termination Restrictions

Letting go of an employee can be a complex process with legal implications. Businesses might face restrictions or potential employee disputes, unlike with contractors.

Contractors: 1099 Workers

Contractors, also called independent contractors or freelancers, are self-employed individuals or businesses that offer their skills and expertise to various companies on a project-by-project or task-based basis. 

Unlike employees, contractors are not paid a regular salary or wages. Instead, they receive a 1099 tax form at the end of the year that details their total earnings from the company. Because they are considered self-employed, contractors are responsible for managing their taxes, including filing self-employment taxes and paying Social Security and Medicare contributions. 

Additionally, they are responsible for securing their health insurance, unemployment benefits, and other protections that typically come with traditional employment.


Specialized Expertise

Contractors bring niche skills, knowledge, and experience that may not exist within your regular workforce. Accessing this expertise on demand allows you to complete projects requiring specific skills without committing to long-term employment.

Flexibility and Scalability 

Contractors provide businesses with flexibility in both workload and duration. You can hire them for short-term projects, engage them during peak periods, or scale down without incurring the costs of terminating an employee.

Potentially Lower Costs 

Contractors handle their benefits, self-employment taxes, and business expenses. This reduces the business’s upfront costs compared to employing a full-time worker, making contractors a cost-effective option for specific projects.


Less Direct Control 

Businesses do not control the specific work methods and processes a contractor utilizes. While you define the project goals and deliverables, the contractor largely determines how to achieve those results.


Contractors act as their own business entities. They are solely responsible for managing their income and expenses, filing all taxes (including self-employment taxes), securing health insurance and other benefits, and navigating business risks.

Risk of Misclassification 

Incorrectly classifying a worker as a contractor when they meet the criteria for an employee can lead to legal and financial penalties for the business. It’s crucial to clearly understand the legal distinctions between employee and contractor status to avoid costly consequences.

Employee or Contractor? When to Hire Each

Choosing between hiring an employee or an independent contractor depends entirely on your business needs and the specific project. Let’s look at some scenarios in which each type of worker might be the better fit:

When to Consider Employees

  • Core Business Functions: Fundamental, ongoing tasks are the backbone of your operations. Employees are ideal for these roles because they become deeply invested in processes and company goals.
  • Long-Term Projects: If a project will be ongoing or will span a significant time frame, having an employee ensures continuity and allows for upskilling within your workforce.
  • Company Culture: Employees become part of your team. Roles requiring close collaboration or adherence to your specific company culture best suit employees who can be trained and integrated into your work environment.

When to Consider Contractors

  • Short-Term Needs: When a project has a clear end date and a well-defined scope, a contractor can contribute their expertise for the duration without a long-term commitment.
  • Highly Specialized Projects: Sometimes, you need a niche skillset beyond what your current staff possesses. Contractors can be brought in to fill specific expertise gaps.
  • Clearly Defined Deliverables: If the focus is on a specific outcome (e.g., a new website, a marketing campaign, etc.), a contractor can manage the process independently if the project scope is clearly defined.

It is crucial to properly distinguish between an independent contractor and an employee. Misclassifying workers can lead to serious legal and financial consequences.

Understanding W-2 versus 1099: Avoiding Misclassification

The tax forms a worker receives (i.e., W-2 or 1099) directly result from their worker classification. It’s NOT just about how you want to pay them. 

Here’s the difference:

  • W-2: Issued to employees. Taxes are withheld by the employer, making tax filing simpler for the employee.
  • 1099: Issued to independent contractors. The contractor handles all their own tax filings, including self-employment taxes.

How Do You Know the Right Classification?

There isn’t a one-size-fits-all answer. Government agencies like the IRS consider several factors, including:

  • Control: How much control do you have over the work process, hours, and methods used? More control leans toward employee status.
  • Tools and Equipment: Does the worker provide their own tools, or do you supply them? Contractors typically use their own resources.
  • Financial Relationship: Do you set a regular salary or hourly wage, or does the worker negotiate payment on a project-by-project basis? Salary leans toward employees.

Why Misclassification Is a BIG Deal

Mistreating an employee as a contractor to avoid taxes can lead to:

  • Back Taxes: You may have to pay the employee’s share of payroll taxes you should have withheld.
  • Fines and Penalties: These can be significant depending on the circumstances.
  • Legal Trouble: Misclassified workers might be entitled to employee benefits or may sue for damages.


Choosing between an employee and a contractor is a decision no business owner takes lightly. There’s no right answer—it depends entirely on your needs and projects. By weighing the pros and cons of each worker type, considering the nature of the work, and correctly understanding tax implications, you can make an informed choice that benefits both your business and the people you hire.

Need Help Finding the Right Workforce?

Partnering with a firm like Enterprise Staffing can be a game-changer for industries like construction, where project needs can fluctuate. 

Enterprise Staffing specializes in tailored staffing solutions, providing access to skilled professionals in New Orleans, Louisiana, and the greater Gulf South region. 

Discover how their flexible workforce options can support your construction projects. Visit Enterprise Staffing today!

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