Entrepreneurs have more options than ever for hiring in today’s remote-work, globalized world. Sometimes, too many options. Should you hire contractors? What about full-time employees? Should you hire locally? What about international options, which can be cheaper? All these choices can get overwhelming fast.
We’re here to help. There are some simple principles to guide your choice–based on your business needs and budget. In this article, we’ll break it down for you.
Contractors v. Employees: Different approaches, different goals
The first decision is between hiring a contractor or a full-time employee. This depends a lot on your business strategy, budget, and project goals.
Need someone quickly for a focused project? Think contractors.
If you’re looking for someone to do a discrete project as soon as possible, a contractor might be the right choice for you. Contractors can be a great fit if:
- You need to find an expert–fast. Independent contractors usually build their offerings around a particular niche and expertise, like software development, marketing, or design. By hiring them, you can access professionals with the skills you need to fill urgent talent gaps, manage turnover, and deliver products and services to market quickly. Since a contractor isn’t a full-time team member, you can likely streamline their hiring and onboarding process. While it’s still important to find someone with the right skills, contractor engagement is usually shorter-term, project-based, or part-time. Which means you’re less locked into an ongoing employment commitment. Depending on your project, you can even hire multiple contractors with expertise in different areas–an often simpler and cheaper alternative to hiring multiple full-time employees.
- Your project is short-term or limited in scope. Sometimes, you just don’t need a full-time employee yet. It could be because your project can be completed in a single sprint and is outside your normal course of business. For example, if you’re an accounting firm and you need to build a website quickly. Or, it could be because you only need a specific task performed on an infrequent basis–like a digital marketing manager for seasonal campaigns. Or, it could be because you’re testing out a new business line, and you want to ensure it has potential before investing in a full-time employee. With contractors, you can be agile and act quickly to pursue specific goals with less long-term commitment — so you can take risks in exploring new business ideas or responding quickly to market demands.
- You want to save money in the short term. With contractors, you can limit your short-term costs by paying them a fixed fee for a project or by limiting the number of hours they work. Plus, you are off the hook for paying for benefits such as healthcare, insurance, retirement, and paid time off, not to mention workers’ compensation and overtime pay. Plus, since contractors are experts in the service they’re providing, and they’re working independently, you can save on onboarding, training, and equipment costs like laptops.
- You want to reduce HR headaches. As an employer, you have different obligations to contractors versus full-time employees. Labor laws often give FTEs the right to things like minimum wage and unpaid leave. Plus, FTEs rely on you to do things like withholding taxes. Finally, it can also be easier to end a contract (or decide not to renew it) versus terminating a full-time employee. Because of this, many states (and countries) have laws that define when a worker is a contractor versus an employee, and it’s important to understand the distinction and comply with the special rules of each employment type.
Need a dependable teammate to support a critical part of your business? Think full-time employee.
If you’re looking for a stable, long-term employment relationship where you’re invested in the teammate’s growth and development, and you want them to maximize their commitment to your business, an FTE might be the way to go. This is especially true if you’re hiring someone to fill a role that is mission-critical to your business or serving a tried-and-true business line.
Benefits to a full-time employee include:
Commitment and loyalty. Contractors typically have other clients, so they’re splitting their time between you and other businesses, some of which might be your competitors. Since FTEs often have benefits and other perks, they can have a deeper investment in your company’s success, and go the extra mile to help your business grow. Regular employees might feel more engaged, develop closer relationships with colleagues, show more loyalty to your company, and become more immersed in your culture than independent contractors.
Control and predictability. With full-time employees, you can set their work hours and conditions. You’re likely to have less control over those things with independent contractors. You’re also likely to experience greater financial control and predictability with regular employees than with independent contractors, who may decide to terminate the contract with short notice or raise their fees.
Lower hourly cost. Full-time employees may cost less per hour than contractors. Contractors often charge more per hour than employees because they need to cover the cost of their own benefits like health insurance and self-employment taxes. Essentially, the contractor’s hourly rate needs to account for the additional costs they bear as a self-employed individual.
Comparing the cost breakdown of hiring contractor vs. employee
Hiring a contractor
| Hourly compensation | Potential additional expenses | |
| Austin-based contractor | $70/hour | Reimbursements for expenses |
| India-based contractor | $28/hour | Potentially higher travel costs (for site visits or other in-person events) Reimbursements for expenses |
Hiring an employee
| Base Salary | Additional costs* | Potential additional expenses | Estimated total costs | |
| Austin-based employee | $112,000 | $41,000 | Onboarding, training, professional development, office supplies, technology | $153,000+ |
| India-based employee | $37,300 | $3,000 | Potentially higher travel costs (for site visits or other in-person events) Onboarding, training, professional development, office supplies, technology | $40,300+ |
*healthcare, pension, retirement, overtime, bonuses, and paid time off, among other things.
Local vs. Global: What to think about
Once you decide whether a contractor or a full-time employee is right for you, you can decide where to hire them. Often, hiring abroad can be cheaper than hiring in the States. Here, we break down the costs for you, using a hypothetical startup in Austin, Texas, that needs to hire a mid-level software engineer to build a new product. For comparison, we’ll look at the costs of hiring in Austin versus hiring in India.
Hiring an Austin-based contractor
Our research shows that an Austin-based mid-level software engineer working as an independent contractor can cost an estimated $70 per hour, for example. Besides possible reimbursement for occasional expenses, the contractor’s hourly rate is likely your only cost.
Hiring an India-based contractor
The hourly rate for an independent contractor residing in India, which has a deep pool of engineers, can look very different. Based on our research of popular recruiting sites like Upwork and Fiverr, we found that independent software engineers can earn an estimated $28 per hour, a 40% savings in hourly rate. This degree of savings can significantly impact your bottom line.
Hiring an Austin-based employee
The median total pay for a mid-level FTE software engineer in Austin is an estimated $153,000. This includes the base salary of $112,000 plus $41,000 in additional pay for things like healthcare, retirement savings, overtime, bonuses, and paid time off.
Hiring an India-based employee
According to research by Remote, our partners in global hiring compliance, the average salary for a software engineer in India is equivalent to $37,300 in U.S. dollars. In addition to that, employers will probably need to pay legally required costs like healthcare, pension, retirement, and taxes. Based on this salary, the startup can expect to pay an estimated $3,000 in extra mandatory employer costs in India.
For hiring a full-time employee abroad, U.S. entrepreneurs have two options with very different cost structures.
- Direct employment. The first route is direct employment, which means you employ the employee through a subsidiary of your company, established in India. This is the most expensive option by far since creating a business entity abroad can cost between $25,000-$100,000 and require a waiting time of more than one year, according to Remote. Additional costs and other factors to consider include capital requirements, maintenance fees, project management personnel time, and knowledge of social norms and changing local regulations. For many U.S. small businesses, this option isn’t the best one–unless you’re planning to employ many people in that country long term or have another business reason to have a large footprint there.
- Employer of record. The second route is to use an employer of record (EOR). An EOR is a third-party organization that legally employs international workers on behalf of someone else, in this case, the Austin-based startup. While the startup still manages the day-to-day work and priorities of the engineer, they hire using the EOR. The EOR handles the payroll, benefits, tax, and Indian regulatory compliance. In addition to avoiding the cost of setting up a foreign business entity, the U.S. startup saves the time and expense of learning and operating the mechanics of Indian payroll, human resources, documentation, and more. EORs often charge a subscription fee per employee per month. Gusto’s EORs, powered by Remote, cost $399 per employee per month in India, on top of the employee’s salary. While this may seem high, it is small compared to the cost of establishing an Indian business entity and hiring experts to maintain ongoing compliance with Indian laws.
Additional thoughts about international hiring
U.S. businesses can save big by hiring internationally. But there are also a few details to consider first:
- Recruiting and travel may cost more. Compared to recruiting domestically, finding qualified candidates in other countries can require added costs, like hiring third-party agencies or in-country experts. Travel costs for site visits or in-person events can also be much more expensive for your global hires than employees traveling domestically.
- You might need to adjust your work style. A distributed workforce can require changes in communications processes and reduced real-time collaboration–especially across time zones. Still, many U.S. businesses succeed at managing a high-performing global team. Pro tip: Try holding fewer meetings, documenting decisions in writing so people can read them asynchronously, using document sharing and project management tools, and providing cultural intelligence training.
Ready to get started?
Whether you choose to hire contractors or employees, domestically or globally, Gusto can help. If you’re curious about global hiring, Gusto Global offers EOR services powered by leading experts at Remote so you can hire full-time employees while letting experts handle global HR, benefits, payroll, and taxes. With Gusto, you can also hire, pay, and manage global contractors in over 120 countries. The best part: you can do these all on a single platform, along with your U.S.-based team.
