The events of 2020 have accelerated the change in how companies hire workers. 59 million people were freelancing in the United States in 2020—up from 53 million in 2014 and 57 million in 2019!
Sites like Upwork, Fiverr, Freelancer, Toptal, and others make it easy for companies to hire great talent with escrow payments and dispute resolution to mitigate risks for both parties.
This gig economy is fantastic for small businesses, solopreneurs, and agencies to supplement their workforce to complete jobs and tasks. But, when should small businesses switch from hiring freelancers to full-time employees?
This article will explore the difference between hiring freelancers vs. full-time employees, the pros and cons, and which is better for your business.
Unfortunately, there's no magic formula to decide whether freelancers or full-time staff are better for your business. You'll need to consider several factors, including your industry, legislation for handling data, labor compliance, feasibility, and security, to name a few.
These are by no means rules for you to make decisions. Instead, use this article as a guide when considering who to hire and when.
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Businesses must know how the IRS defines a freelancer because this distinction can affect the freelancer's independence.
If an employer controls certain behavioral and financial aspects of the agreement, the IRS classifies the freelancer as an employee, and the employer may be liable to pay benefits and taxes.
The IRS divides behavioral factors into four categories:
- Type of instructions given: Where, when, and how the freelancer must work, tools or equipment, subcontracting, where to purchase supplies, who must complete the work.
- Degree of instruction: It is important to determine how much control the employer has over the type of instruction. To avoid grey areas, it's best to minimize instructions or control over how a freelancer completes tasks.
- Evaluation systems: "If an evaluation system measures the details of how the work is performed, then these factors would point to an employee." - cite: IRS Official Website
- Training: If you provide freelancers with training on how to complete the job a certain way, the IRS may classify this as an employer-employee relationship.
The IRS divides financial factors into four categories:
- Significant investment: Applies to tools and equipment the worker needs to complete their job.
- Unreimbursed expenses: Freelancers don't typically have expenses reimbursed.
- Opportunity for profit or loss: The possibility of a loss indicates the worker is a freelancer.
- Services available to the market: Freelancers are free to advertise their services and work for other employers. The IRS might consider any restrictions as an employer-employee relationship.
- Method of payment: Even when employers pay freelancers an hourly rate, there is no guarantee of a regular wage.
Type of Relationship
- Written contracts: Even if a written agreement states that the worker is a freelancer, the IRS will investigate financial and behavioral control to make their determination.
- Employee benefits: The IRS considers insurance, pension plans, paid vacation, sick days, and disability insurance as employee benefits that don't extend to freelancers.
- Permanency of the relationship: An indefinite working relationship might classify a worker as an employee. Specifying the contract's termination (whether it's a date, completion of a task, or project) eliminates any grey areas in this regard.
- Services provided as key activity of the business: "If a worker provides services that are a key aspect of the business, it is more likely that the business will have the right to direct and control his or her activities." cite: IRS Official Website
Six Key Differences Between Freelancers and Full-Time Employees
Here is a quick snapshot of six key differences between freelancers and full-time employees and how they affect your HR and payroll.
Note that the employee includes full-time and part-time workers.
- Freelancer: Pays their own self-employment tax
- Employee: Company withholds and pays taxes, including social security, and Medicare tax
- Freelancer: Pays for their own benefits
- Employee: Company provides benefits as part of the employee's remuneration package
Unemployment and workers compensation:
- Freelancer: Not eligible
- Employee: Eligible—with conditions
- Freelancer: Flexible work hours—but usually with objectives and deadlines
- Employee: Hours set by the employer
- Freelancer: Sets their rates, and these may vary for different tasks and services
- Employee: Set by the employer/negotiated at the start of contract
Place of work:
- Freelancer: Remote
- Employee: Company offices/remote (sometimes with restrictions)
When to Hire Freelancers vs. Full-Time Employees
Many business owners struggle to decide when it's necessary to hire freelancers or full-time employees. There are several factors you must consider to determine what's suitable for your business and available resources.
If your business handles or stores client or user data, there may be legal requirements for who is allowed access to that information. You'll also want to consider the security risks of having a freelancer or full-time employee handling sensitive data and intellectual property.
If you have tasks or projects requiring someone to work intimately with sensitive company information, you should hire a full-time employee over a freelancer.
You'll have greater control with a full-time worker, including where they work, the networks they connect to, and other security protocols. You can also supply them with secure company devices to log into systems securely.
We recommend you complete a security audit to learn more about your company's vulnerabilities and who you want to hire to handle sensitive company data.
Make sure you always use a password manager for freelancers and full-time team members to limit access to applications and data.
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One of the challenges with hiring freelancers is that they often work with several clients, creating scheduling conflicts and limiting their availability. They may only be available to deliver work on certain days or timeframes.
If you're struggling to meet deadlines for specific tasks because of freelancer availability, it might be time to fill that position with a full-time employee.
You'll need to complete a cost analysis of the value of those tasks, the cost for delays, and how you can increase capacity (and revenue) with a full-time staff member in that role.
You should avoid hiring freelancers for roles where they must interact with your clients or users. Freelancers don't have a vested interest in your business, nor do they share your company culture and values. You also have to worry about a freelancer stealing your business!
If you're a small company, hiring an account manager can help facilitate communication between your clients and freelancers. If a freelancer does have to be on a call (to answer technical or specialized questions), make sure a full-time employee is present to lead the conversation and only call on the freelancer when necessary.
If you need someone specialized to communicate with clients and users regularly, it would be better to hire a full-time employee. This person will help maintain consistency while promoting the company's best interests.
You might not see the gains immediately, but over time that consistency will prove invaluable. As a specialist, this person will have a positive impact on growing your business.
You need to constantly measure the feasibility of hiring a freelancer vs. a full-time employee.
First, calculate the cost of a full-time employee for each service you provide. For example, a creative agency might need a marketer, copywriter, UX designer, developer, account manager, and social media manager.
Your full-time costs per role should include:
- And other costs associated with hiring a full-time employee
- Office/remote work costs
Every six months to a year, you can calculate how much you spend on freelancers to complete a specific role vs. the cost of a full-time employee. If you're consistently spending more on freelancers, then it's time to consider a full-time team member.
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