Should Startups Hire Permanent Employees or Contract Resources?

by Viktor Bogdanov
January 31, 2017

Startups are usually faced with making a decision about hiring permanent full-time employees or hiring independent contractors. Sometimes it can end up being a mix of both to manage the requirements of the business.

Some startups begin their journey by hiring contracted workers and then later hiring a few permanent employees. But what’s the best approach? What are advantages and disadvantages? Let’s take a look.

Hiring Permanent Employees

Permanent employees are usually full-time workers that work for a business on a contract of hire. Further, the employer and employees expectations and responsibilities are explicitly detailed in the contract.

The key advantage here for startups is the fact that they have complete control to direct the employee’s schedule, training, and require the individual to only work for you. There are very few restrictions or limitations on what can be assigned or the terms of termination without pay.  

Further, you can also have the option of managing your budget by paying employees in shares. This type of worker is also more engaged with the company and its goals because they are in it for the long haul. Independent contractors come at the start of a project and leave at the end of it. As a result, they might not share the same enthusiasm as a permanent full-time employee. 

But permanent staff come with loads of state and federal regulations. This means that you have to follow regulations when it comes to salaries, overtime, and other aspects of employment that fall under the law.

Startups will also have to deal with payroll taxes and pay half of the FICA taxes (Social Security and Medicare), worker’s compensation insurance, and unemployment insurance for each member of staff.

Hiring Independent Contractors

There’s a trend moving towards more people following the path of the independent contractor. In fact, 40% of the American workforce are expected to be freelancing by 2020. This phenomenon is driven by people wanting more flexibility in their lives. Further with technology outsourcing playing a major role in making tech startups successful, taking the freelance path has become the norm at home and abroad.

But hiring independent contractors for your startup can feel like a completely different experience. For example, you can assign duties to a contractor and impose a deadline and a work product. But you won’t have any of the normal controls that a company can have over an employee.

You can’t tell an independent contractor how to do their work or stop them from working for other companies. Further, they also often set their own working hours and use their own tools to get the job done.

But the advantage here is that you will have very few tax or reporting responsibilities. So your payroll department won’t be overburdened maintaining records and paying taxes.

At the end of the financial year, all you have to do is evidence the amount you paid an independent contractor in a Form-1099-MISC. There is also no need to withhold or pay FICA taxes in this scenario. Further, if the independent contractor is based overseas, you won’t have to file a single form.

Hiring Contract Resources

As far as software development, another popular staffing model is contract resources, i.e. when startup gets on-demand plug and play developers, testers, PMs, etc from a third-party staffing vendor, allocates them either in-house or offshore on vendor's site, and uses as staff augmentation or standalone resources for a certain scope of project tasks.

The key advantage of this model is flexibility, as you can easily scale your team up or down depending on your current project needs and overall economic situation. Another benefit is the ability to test and swap resources until you find a perfect match for your project team. Professional vendors normally have a database of available consultants to source from and/or use progressive headhunting best practices to get a required resource within a short timeframe. 

Such contract resources are normally billed on a time and materials basis or hourly / daily basis and can save a startup a fortune if compared to full-time employment.

So What’s Better Option for Startups?

As you can see from the above, each hiring option comes with its own set of advantages and disadvantages. Further, this decision can also be relative to a startup’s needs and available budget.

For example, if the work needs to be conducted under supervision, an independent contractor will be out of the question. The same applies if you need to control work hours and the equipment used by the worker. But a contract resource can be a healthy and cost-effective alternative. 

Often companies hire independent contractors to do work that’s not central to their business. But that’s slowly changing because of the lack of local talent and cost effective options available out of state or overseas.

These days, there are plenty of professionals who are available remotely and can operate with very little supervision. So it can be a great option if it fits the needs of your startup to look elsewhere.

Sometimes if your startup is following a lean model, you can start out by hiring independent contractors to test their abilities (contract to hire, or C2H).  Once you’re sure that you got the right people onboard, you can switch them to a permanent employee status.

Each hire must be approached on a case by case basis to figure what’s best for your new business. At the same time, it’s also good to note that the IRS will consider a worker to be an employee unless you can prove otherwise.

So regardless of whether you choose to go with a permanent employee or a contract resource, it’s imperative that you do your homework before making a decision.

Are you looking to hire IT Talent for your in-house or offshore project fast and with no HR, IT and administrative hassle? Feel free to send us your IT Staffing request!

Chicago startup guides

Best Companies to Work for in Chicago
Best Software Engineer Jobs in Chicago
Coolest Offices in Chicago Tech
Best Sales Jobs in Chicago