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Hiring the First Employee for Your Business – When Is It Time?

Being a solopreneur is exciting. You’re growing your own business and reaping the rewards of your hard work, and you have the freedom to choose when and where you work. But most small-business owners start out doing it all. Eventually, they need to build a team to reach the next level of success.

Hiring can be nerve-wracking for any business owner, even if it’s not your first time. Do you have enough work to keep someone busy long term? Will they care about your clients or customers as much as you do? Should you hire an employee or independent contractor?

Here’s what you consider when determining if it’s time to grow your team and how to shift from solopreneur to entrepreneur.

When Is the Right Time to Hire?

Finger Pointing To Creative Lightbulb Candidate Employee Job Search

Knowing when to hire is essential. Hiring too early causes several problems. If you don’t have enough work for your new team member, you’ll end up paying them for idle time. That drain on your resources just leads to cash-flow problems and added stress.

But if you hire too late, you risk missing opportunities. You don’t want to have to cancel projects or delay a new product launch simply because there aren’t enough hours in the day. For many solopreneurs, finding the right moment to hire is the difference between failure and success.

There’s no one-size-fits-all rule for when to hire your first employee. But there are some general guidelines to help you decide.

Do You Need to Generate More Revenue?

There are two reasons to hire an employee:

  1. To make money for the business
  2. To save money for the company

If your customer service is suffering, you don’t have enough time to handle growth on your own, or you feel overworked while still not getting everything done, that’s a good sign bringing on help can increase your revenue.

Hiring a new employee allows you to expand your product or service offerings or take administrative work off your plate so you have time to focus on revenue-generating activities. For example, you could hire someone to handle your bookkeeping, manage your email and calendar, and do other administrative tasks so you have time to focus on sales.

Although it’s not as common, hiring help might save your business money too. For example, if you’ve been contracting with a pricey advertising and PR agency, hiring a part-time employee to handle marketing tasks could cut your costs.

Just make sure you don’t hire an employee for a job you don’t need done. For example, if your target customers aren’t on Instagram, hiring a social media strategist to manage and grow your Instagram account creates additional expenses without any increase in revenue. So think carefully about the kind of skills you want to bring on and how the extra help will contribute to your business. If necessary, hire an independent contractor on a short-term basis to find out if having an employee in that position is worth it.

Do You Have Enough Work Within a Specific Skill Set?

Solopreneurs have a lot of responsibility, including sales and marketing, developing products or delivering services, bookkeeping, paying bills, and collecting invoices. Before you hire an employee, think about which of these tasks you want to offload and whether you’re likely to find one person who can handle each of them.

For example, if you want to hire someone to help with bookkeeping, paying bills, and collecting invoices, it’s easy to find one employee with bookkeeping or accounting experience who can do all of those things. But you’ll have a more difficult time finding one person who can handle sales and bookkeeping with equal skill.

If you need just a little help in several areas, it’s better to look for ways to increase efficiency through automation. For example, invest in social media scheduling software like Tailwind and cloud-based accounting software like Quickbooks that automatically pulls and classifies transactions from your bank account. If you need a lot of help in a specific area of your business, hire someone with that particular skill set to handle that area of your business.

Get clear about the specific responsibilities you want your new hire to handle and set out to find someone with the expertise to be productive in the role.

Should I Hire an Employee or a Contractor?

You must also decide whether to hire an employee or an independent contractor, or freelancer. There are some significant legal differences between the two.

EmployeeContractor
TaxesEmployers are responsible for withholding income tax, Social Security, and Medicare.Contractors are responsible for their own income and self-employment taxes.
Employment LawsEmployees are covered by several federal and state employment laws, including minimum wage and overtime regulations.Though it isn’t true in all states, contractors are typically not covered by employment and labor laws.
BenefitsEmployers may be required to provide vacation, holiday, and sick pay to full-time employees.Employers are not responsible for providing paid vacation, holidays, or sick pay to contractors.
InsuranceEmployers may be required to purchase workers’ compensation insurance and pay unemployment insurance taxes.Employers are not required to purchase workers’ compensation or pay unemployment taxes on independent contractors.

A word of caution: Many people assume hiring an independent contractor is the way to go since they aren’t responsible for things like withholding, benefits, and insurance as they are when they hire an employee. However, the IRS has rules about who you can treat as an independent contractor and penalizes employers who misclassify employees solely to avoid taxes.

Whether you should classify your new hire as an employee or an independent contractor involves three factors.

  1. Behavioral Control. An employer has the right to direct and control work performed by an employee. However, a business owner cannot determine how an independent contractor works, only the desired results of the work.
  2. Financial Control. An employer has a right to direct and control the financial and business aspects of an employee’s job. For example, an employer can mandate an employee cannot have a second job or start a side business that competes with the employer’s business. Independent contractors are generally free to work for other clients and seek out other business opportunities.
  3. Relationship. An employer-employee relationship typically continues indefinitely, while the relationship between a business and a contractor usually exists for a specific project or period. It’s good to have a written contract between the company and the contractor that states the worker is an independent contractor. But it’s not sufficient on its own to determine the worker’s status.

Outside the IRS rules, think about your business needs when deciding whether to hire an employee or contractor. The questions below will help you work through the decision-making process.

1. Do You Need Long-Term Help or Help on a Short-Term Basis?

If the work to be done is just a short-term project, you may want to hire an independent contractor. For example, if you need help building a website, but you won’t have much work for a Web developer to do once your site is up and running, that’s a good project for a contractor that you find from a platform like Fiverr.

On the other hand, if you need ongoing help fulfilling and shipping customer orders, you may be better off hiring an employee.

2. Is the Work Part of Your Core Product or Service?

If the work to be done supports your business but is not a part of your core product or service, you may be better off hiring an independent contractor. For example, you might outsource monthly bookkeeping to an independent contractor. However, if you need someone to handle customer service for your products, you’re better off hiring an employee.

3. Can You Afford an Employee?

It’s easy to predict and control the cost of hiring a contractor by negotiating a flat fee or hourly rate. Beyond that agreed-upon compensation, there are few if any additional costs.

Hiring an employee is often much more expensive. Salary is just one component of the cost of hiring. You also have to plan for taxes and other government-mandated expenses, buying things like desks and computers for them to use, employee benefits, and how you’re going to calculate their paycheck with all the withholding you have to do.

  • Payroll Taxes. After salary, payroll taxes are usually the highest cost of hiring an employee. They include the employer’s portion of Social Security and Medicare taxes and federal and state unemployment taxes. ADP maintains a database of applicable payroll taxes by state to give you an idea of what it costs to hire an employee in your location.
  • Benefits. The cost of providing employee benefits like health insurance, disability and life insurance, and retirement plans is anywhere from 20% to 40% of an employee’s gross salary.
  • Workers’ Compensation. Most states require a business to purchase workers’ compensation insurance as soon as they hire an employee. The cost of obtaining workers’ compensation depends on your state and the type of work the employee performs.
  • Payroll Processing. When you pay a contractor, you cut them a check for the amount you owe. But paying an employee means calculating and withholding payroll taxes, sending those taxes to the state or federal agencies, and preparing quarterly payroll tax returns. Most businesses outsource this task to a third-party payroll provider like Quickbooks Payroll. The cost of outsourcing payroll depends on the level of service required and how many employees you have but typically costs at least $15 to $20 per month.
  • Tools and Equipment. Generally, contractors are responsible for providing their own computers and any necessary tools and equipment. But employers are responsible for providing necessary equipment and supplies for employees. Depending on the type of work you expect your employee to handle and where you want them to do it, you have to provide things like office space, a desk and chair, a computer, a phone, and other equipment and supplies.

Final Word

Deciding when and how to hire your first employee or independent contractor depends on your business’ needs and long-term plans. Some companies thrive by using contractors, while others need the more permanent full-time or part-time help of an employee.

To help you decide whether to hire, test the waters by hiring an independent contractor. Create a freelance contract that lasts a few months to see if you have enough work to keep them busy and determine whether they help your business grow. If the contractor works out well, ask if they’re willing to transition to employee status. If not, hire someone else for the job.

Have you hired an employee or an independent contractor? How did they impact your business?

Janet Berry-Johnson
Janet Berry-Johnson is a Certified Public Accountant. Before leaving the accounting world to focus on freelance writing, she specialized in income tax consulting and compliance for individuals and small businesses. She lives in Omaha, Nebraska with her husband and son and their rescue dog, Dexter.

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