Kimone Napier (00:00.798)
Oftentimes, more often than not, I see a lot of founders and business owners misclassifying contractors as employees. And I don't want you to get in trouble. This is something that you can be fined for.
Kimone Napier (00:28.206)
Welcome to Hire Breakthrough, a podcast dedicated to helping entrepreneurs like you take the breakdown out of their hiring breakthrough. If you're a founder who is ready to take back control and build your A team without the overwhelm, you are in the right place.
Your host, Kimon Napier, is a hiring strategist, speaker, consultant, and CEO of Hire Breakthrough. We're on a mission to help founders like you connect with the right talent to scale higher. Your time is way too valuable to stay stuck, and we want to show you how to stop chasing unicorns, take an intentional approach to your talent strategy, so you can make your next right hire. Let's get started.
Welcome to the Hire Breakthrough Podcast. My name is Kimone Napier, AKA The Hiring Strategist. And today we're gonna be discussing the difference between hiring a contractor versus hiring an employee. So I'm going to give you the 411 on what is the real difference. So before I jump in and get started, I think this is so crucial for any business owner who is imagining growing their business, who is currently growing their business and are ready to hire.
whether that be a contractor versus an employee or vice versa. The main reason why I wanted to record this podcast episode is because oftentimes, more often than not, I see a lot of founders and business owners misclassifying contractors as employees. And I don't want you to get in trouble. This is something that you can be fined for. So.
Let's jump in to discuss the key differences between contractors and employees so you know what type of worker is right for you to hire in your business. Okay, so the first thing that I wanted to talk about is that an employee is on your company's payroll. So they're going to be receiving the wages, the benefits, you know, in order for you to hire them, you're going to send them some type of employee agreement reported to the state in the whole nine yards. A contractor is an independent worker. They have the autonomy and flexibility
Kimone Napier (02:37.038)
but they will not be receiving benefits such as health insurance, they won't be receiving any pay time off and vice versa. So the difference is like at the end of the year, you're going to send your employees the W-2, but your contractors, you'll be sending them a 1099 because you pay taxes for your employees. Contractors, they pay taxes for themselves. So that is an initial key difference between the two. Now, misclassifying workers, it can result in back taxes. You can get fined.
You can get penalties. There could be even some type of legal disputes between you and the contractor. So this article is crucial for you to understand how to classify your workers properly. Now, this is another thing that I wanted to talk about. Oftentimes, more often than not, business owners and founders are quick to hire a contractor for any and everything. Now, if you had just started your business,
the first couple of people that you hired to do some work, maybe a contractor. But if you are, you know, past six figures, if you are venturing to get to seven figures and even beyond that, you need to start thinking about hiring employees because of course, the more money that you make, the IRS is watching these things. And believe it or not, people say it, the IRS is sitting there waiting to look like, okay, this person is making all this money.
let's see if this person is actually doing things the legal right. So you can get audited very easily for a lot of these things and misclassification of workers is a really common thing that people get audited on all of the time. So yes, hiring a contract worker rather than a full-time employee could initially save you business money, but eventually it can actually cost you because a lot of you are misclassifying your workers.
Because when you hire a contractor, the appeal is that you're not paying for health insurance, you're not paying for 401k matching, vacation time and other benefits. But of course, there are reasons why it is better to hire an employee depending on what it is that you're looking for. Because hiring a contractor comes with limitations and it comes with potential risks. So I need you to understand this because I don't think
Kimone Napier (05:01.354)
A lot of founders and business owners really think about it, you know, basically in dollar signs and cents in that way, before you decide to hire whatever worker that you need for any type of role, you need to understand the differences between contractors and the differences between employees. So you do not have to face the consequences for misclassifying workers. The first thing is autonomy. That is a
big, big difference between a contractor and an employee because of course it affects how they're being paid. Your employees are subject to autonomy from you who is their employer. A contractor on the other hand, they're typically given like some type of project to work on. It is very much a start and finish type of arrangement when it comes to contractors.
because you don't have any control over the time that the person work or anything. The point of a contractor is for them to deliver the work, meaning you're not telling them what times they need to be online. So if you are one telling your contractors, you need to make sure you're available between 9 a.m. to 5 p.m. every single day. Technically, you are breaking the misclassification rules and that person would be deemed as an employee
under IRS standards. of course, something for you to keep in mind. Because autonomy, I'll tell you this, that is one of the most common ways that people, particularly founders, misclassify their workers. So that's the first thing that I want you to think about. The second thing is onboarding and training. Your onboarding and training process is very different for a contractor versus an employee. And I'll tell you the reason why.
Contractors, they're expected to focus on a specific project. That means the information that you're giving them is very crucial for the task that they need to complete. So you're not going to be giving them a whole employee, you know, handbook or anything like that, because if you were to do so, that could be misclassifying that contractor as an employee. Now, full-time employees, part-time employees,
Kimone Napier (07:22.602)
they require a more lengthy onboarding process because they need to understand the intricate details of your team. They need to understand your company culture, the overall goals. You need to provide them with benefit information, safety information. There's so many things that go into that onboarding process. So onboarding and training should look very different. When in doubt, your contractor should be your specialist, meaning that you're hiring them for a specialized area.
where you're giving them the tools and information that they need to complete the task that you're giving them. So that is a real key difference when it comes to contractors and employees in onboarding and training. The third thing is, of course, what are your hiring goals? Now, this is a major key difference between the two. And often I know there's big conversations about this, but I just have to say this.
Oftentimes, it goes back to the whole autonomy things that I was talking about earlier, where people are saying like, you know, I hired this VA, and I don't feel like they're dedicated to my business. I feel like, you know, they're all over the place. You know, I want them to be more engaged, more invested. Well, typically when you're hiring a virtual assistant, also known as a VA, you're hiring that person as a contractor. A contractor,
like I said, is hired to do short-term work. That's what is the IRS standards. Meaning that you cannot expect this person to be a hundred percent well-vested into your company because typically it's not in their role as being a contractor on your team. The difference is an employee, whether it's a part-time or full-time employee, you're buying into this person.
Basically what you're doing is that they are employed by your company because you want to gain some level of loyalty. So you as founders, you need to realize is that contractors are always looking for their next gig. So they're not invested in long-term outcomes as a full-time employee may be. Now, of course, there is the whole gig economy where you do have employees who have their side hustle, but not everybody does. The difference is
Kimone Napier (09:47.552)
you are responsible for this person's paycheck when they're employee and they know every two weeks, know, every month or however your payroll is run, they are going to be getting a check from you and in order to do that, they need to be doing their job. So this is a big thing that I hear in the startup space where we're talking about long-term loyalty, but your contractors are not required to be long-term. That is a requirement for employees. So,
Oftentimes I hear founders, you know, they're complaining about the loyalty aspect of it. But if you really want loyalty, you need to hire an employee. And of course, if you don't know who it is that you need to hire as an employee, or you just need to figure out the steps, you can of course contact me and my team at Hire Breakthrough, and we are here to help you.
Kimone Napier (10:45.174)
If you haven't checked out the Hire Breakthrough Calculator yet, what are you waiting for? The Hire Breakthrough Calculator is a simplified tool allowing you to calculate the budget for your next hire minus the hassle. If you find yourself saying, can't afford to hire or need to create your hiring budget, this is the tool for you. Go to hirebreakthrough.com slash calculator and check it out right now.
So that's the third thing is the overall hiring goal. Think about is this a project? Is it a particular assignment? That's more so for a contractor. But if it's long term work, particularly roles that are pertinent to the future and the goals that you want to hit in your company, that is something you want to consider for an employee. Now the fourth thing to talk about is the flexibility.
there's a different degree of flexibility in the work between a contractor and an employee. So a contractor is working for the company. So they are subject to all the rules and the obligations that you are setting forth as the founder of that company. The difference is a contractor, they have the choice to work for one or multiple organizations. So oftentimes contractors are juggling several clients at one time.
I'll give you a little tip. One of the biggest things people get fined for when it comes to misclassification of workers is that they'll say, this person has been working for me as a contractor. They may have been contracting with you for five years, but they have no other clients. That alone is misclassification if you were to get audited by the IRS, by the Equal Employment Opportunity Office.
all of that because if somebody is truly a contractor, that means they have their own business and they have additional clients. So for the founders who are really scrutinized by their contractors working with other people, guess what? As you continue to make money, you can be audited for this because it is breaking the IRS guidelines, distinguishing the difference between a contractor and an employee. So that's the difference.
Kimone Napier (13:04.662)
An employee is working for the company, so they have to listen to the rules set by the company, whereas the contractor is working for themselves and they are juggling several clients typically at a time. So that level of flexibility, depending on the type of work that you need them to do, can be a benefit or it could be very limiting. So it depends, what is the type of work-life balance that you are envisioning for this person to have?
Now, if you want somebody to just do very mundane tasks, it's just checking a box, then of course that's something that you want to consider for an employee. But if you're looking for that buying, that is something that you want to consider for an employee versus a contractor. So I'll give you another example. Contractors can take off whenever they feel like, but the limiting side of that is that they're not making money when they are taking off.
So if a contractor says, hey, I'm going on vacation between the months of July and September, there's nothing that you can do about that. Now, of course, you can move on, get a different type of contractor, but it's kind of like you're in the run around. You're constantly in this circle of, have to fire, I have to hire, I have to fire, I have to hire. And you have to ask yourself, are you limiting the success and the goals?
of your business by constantly hiring contractors. Contractors is a wonderful way for you to get help that you need, eventually you do need to hire an employee because you do need that buy-in and that loyalty that doesn't necessarily come from a contractor. So these are the ways that you can distinguish between contractors and employees. So, you know, when in doubt, ask yourself,
Are you, you know, the questions that when, where, and how is the work getting done? So if the work is being performed at your place of business, if you have some type of brick and mortar, or does the contractor work remotely? These are different questions that you need to ask yourself throughout this process if you want to make sure that you're not misclassifying workers. Now.
Kimone Napier (15:25.006)
I know you were waiting on the big question, like what will happen if I misclassify a worker? So typically you're going to pay the back taxes and the fines and penalties from misclassifying that worker. So it'll be based off of like a W-2 and it'll say something like, you know, the company failed to file and, and the whole nine yards and they're going to take a percentage of the wages where they feel like you fail to.
withhold taxes for this person. Now that is the bare minimal. You do have extreme cases where they'll look at it for a number of years as well. So make sure you are classifying your workers properly. I always say it is great to have a mixture of employees and contractors, particularly for small businesses. Because I know one thing that people talk about all the time is the budgeting.
and the expenses and the whole nine yards. I get it. But at the same time, you have to make sure as you are increasing your revenue and you're bringing in more money, that you are classifying your workers in the right way. And you want to make sure that the roles that are pertinent to the success of your company, right? Because that's something the IRS also checks. You want to make sure that those roles are employment roles, particularly full-time employment.
as much as possible. So I hope this was extremely helpful. This was to discuss the difference between hiring a contractor and employees. So I hope it was extremely clear for you. If you enjoyed this episode of the podcast, please rate and review the podcast below and stay tuned for the next episode.
Be sure to visit hirebreakthrough.com/scale so our team can help make your next right hire today.
