Want to Hire Employees Instead of Contractors? Take These 3 Actions Today

By: Shay James

working woman looking at her watch

It’s now possible for people to work from anywhere in the world. For creative agency owners, this means you’re able to find talent from across the globe! But how you should hire and pay that talent may remain a mystery. 

If your agency is relatively new and you’re just beginning to delegate work, you may start by hiring independent contractors to support one-off projects or provide specific services. 

As your agency grows and your revenue becomes more sustainable, you might find yourself wondering if it’s time to bring in full-time (or even part-time) employees to replace some of the headaches that can arise from hiring independent contractors.

Independent Contractors Vs. Permanent Employees

There are differences between an independent contractor and a full-time employee that you’ll want to consider as your business grows. 

Hopefully, you already know that it’s not simply up to you to determine whether someone is an independent contractor or an employee — that’s decided by the IRS. If you misclassify a contractor and they actually fall under the label of employee, the liability falls on you as the employer, and you could end up owing big to the IRS in employment taxes for that worker.

However, getting into those specifics is a bit outside the scope of this article. For now, we’re going to focus on what you can do if you decide it’s time to shift your business model from hiring contractors to employees.

Independent Contractors

Independent contractors have specific skills and can be incredible assets to your company. You may consider hiring independent contractors in the early stages of your business when you need help, but don’t have room in the budget to accommodate a full benefits package or commit to ongoing work. 

Independent contractors don’t have to be on your payroll and once the job is done, so is your commitment to working with them. It’s easy to terminate a relationship with an independent contractor, but it’s also easy for them to terminate a relationship with you.

Hiring contractors comes with its own set of challenges. For instance, contractors may come and go with more frequency than part-time or full-time employees. And depending on the particular contractor, they may be less invested in your business’s long-term performance than an employee might be (although this certainly isn’t always the case).

Permanent Employees

Permanent employees can contribute to a more cohesive, consistent work environment and even be more cost-effective over the long term. Yes, you’ll have to pay employment taxes and maybe even cover benefits such as health insurance and paid time off. 

But hiring long-term employees lessens the likelihood that you’ll have to find and vet new workers for every project. 

With permanent employees, it’s simply easier to cultivate a healthy company culture. You have more say over your employees’ time and how they complete projects than you ever would with independent contractors. And it’s a lot easier to engage employees in team-building activities and processes than it is with contractors — even if those employees work remotely.

Plus, employees who are appreciated and provided with a good compensation package are likely to be more productive than a contract worker who jumps from job to job and may not always invest their best efforts into your business.

How To Transition From Independent Contractors To Employees

If you’re ready to transition from a team of contractors to a team of permanent employees, you’ll need to make a few changes to your hiring system. Once you flesh out the details with these tips, you’ll be on your way to hiring a fantastic team of employees.

1. Calculate the Cost Differences Between Contractors and Employees

There are significant cost differences between hiring independent contractors and employees. Calculating the costs of hiring an independent contractor is relatively straightforward: you’ll simply need to ensure that the rates your contractors charge are affordable for your business so you can maintain profitability.

When transitioning to hiring employees, you’ll want to consider the following factors in addition to the hourly wage or annual salary you plan to pay:

  • Payroll taxes

  • Benefits including health insurance, retirement plan administration fees, and employer retirement contributions

  • Unemployment insurance

  • Paid time off 

  • Equipment and supplies for the employee

  • Other overhead costs if your agency operates in-person

Knowing these costs can provide you with more clarity on the compensation you can offer to a prospective employee. Keep in mind that, in general, the hourly rates you pay independent contractors will often be higher than the hourly rates you should pay employees. 

This is because contractors are responsible for paying their own self-employment taxes, providing their own equipment to perform the work, and supplying their own “benefits,” among other things. Employees, on the other hand, are counting on you to cover those costs.

2. Know Your Ideal Employee

If you’ve been working with independent contractors, you may wonder why someone would ever be willing to work for you as an employee, potentially for a lower hourly rate and with less freedom than they could enjoy as an independent contractor.

Here’s the thing: You have to remember that some people are more excited and motivated to work as employees. Many people prefer the stability and consistency of permanent employment over the responsibility of independent contractorship. (And if your agency is offering remote employment positions, all the better.) 

Just as you know there are ideal clients and non ideal clients out there, there are ideal employees out there who would much rather work for you — and you alone — rather than manage all the complexities of being an independent contractor.

3. Put Together an Enticing Benefits Package

To compensate for the lower compensation you can offer, consider putting together an enticing benefits package. If you can offer benefits such as health insurance, a retirement plan option, and flexible paid time off, these are great incentives to attract top employee talent. 

But not every benefit you offer has to cost money. 

For instance, offering the ability to work remotely and on a flexible schedule is an incredibly enticing benefit — and is usually easy for creative agencies to accommodate. In fact, if you’ve been working with contractors, this is probably already built into your workflow processes. Make sure to highlight this benefit for prospective employees in your job description.

Remember that as an employee, your workers have a lot less to worry about than they would as an independent contractor. Remind them of all the security you can offer when they come to work with you, and you can’t go wrong.

Partner With an Outsourced CFO to Ease the Transition From Contractors to Employees

At Lamplight Advisors, we love to share in the journey creative agencies take to become thriving sustainable businesses. While it can be a challenge to scale your agency from one level to the next, we hate to see financial questions or fear of the unknown stop agency owners from taking the next big steps they need to take so the agency can thrive.

As outsourced CFOs, we help you organize and manage your business finances so you have the clarity you need to make those big decisions that propel you forward. And we have plenty of experience helping creative agency owners make a successful transition from working with contractors to hiring a team of permanent, loyal, and dedicated employees.

To see if we can help you make this transition a breeze for your agency, click here to schedule a conversation today.