Small Businesses Started Post Covid are a Key Driver of the Increase in Contractor Usage

Key Findings 

• Small businesses started after 2020 are increasingly turning to contractors for support. Since 2018, the use of freelancers and contractors among small businesses has increased by 15%. Additionally, the contractor to employee ratio is greater for businesses started post-Covid (1:4) than pre-Covid (1:6). 
• Southern cities lead contractor hiring. Six of the top ten cities with the highest rates for contractor hiring are in southern states. The high rates of entrepreneurship, rapid population growth, and business-friendly environments in the South all contribute to the high contractor-to-employee ratio. 
• Contractors earn the most in tech hubs, but Minneapolis and Philadelphia are the most affordable cities for contractors to live. The top three cities with the highest average pay for contractors are San Francisco, San Jose, and Boston. However, when accounting for the cost of living, Minneapolis and Philadelphia are where contractors’ earnings stretch the farthest. 
• More small businesses are going global. From July 2023 to July 2024, the share of companies paying international contractors increased by 11%. The Communications, Technology, and Consulting industries have the highest share of companies paying an international contractor, with nearly 1 in 10 companies paying an international contractor in these industries.  

Newly established small businesses are increasingly turning to contractors for support.

The ratio of contractors to employees on the Gusto platform has increased by 15% since 2018. This increase reflects a continued acceleration of the trend towards temporary, flexible jobs. In the years leading up to 2020, the ratio of contractors to employees was declining due to the tightening labor market leading up to the pandemic. However, this trend picked up again with vigor post 2020 – the ratio of contractors to employees increased by 46% from its low in 2020 to 2024. 

There are several factors that lead businesses to increase contractor utilization: 

• Periods of economic uncertainty often lead companies to hire more contractors as a way to remain agile and flexible, allowing them to scale their workforce based on demand without a long-term commitment. Over the past several years, the U.S. economy has been in the midst of extreme economic uncertainty while still growing relatively quickly. This dynamic of growth and uncertainty has contributed to companies’ increased use of contractors in recent years. 
• There has also been a growing trend towards entrepreneurship. With business formation at an all-time high, there is more demand for contractor support to help businesses grow while maintaining flexibility. Additionally, a greater share of the U.S. workforce is choosing to freelance. A report from MBO Partners estimates that 72 Million workers engaged in work as an independent contractor in 2023. With many professionals choosing to work as independent contractors rather than traditional employees, there is more available talent for companies to choose from.

Notably, this trend is more pronounced among smaller companies and those established more recently. Businesses founded post-COVID have, on average, one contractor for every four employees, compared to one contractor for every six employees at businesses founded before COVID. 

This difference highlights a shift in business practices and attitudes toward workforce composition. The post-COVID business landscape has driven many newer firms to prioritize flexibility and adaptability, leveraging contractors to quickly scale operations and access specialized skills without the long-term commitment of full-time hires. 

Additionally, smaller firms have a notably higher ratio of contractors to employees. This suggests that contractors are an integral part of many small businesses, allowing them access to highly specialized workers needed to manage and grow their business. 

Southern cities lead the country in contractor hiring.

Six of the top ten cities with the highest contractors to employee ratio are located in the South. These cities include Atlanta, Austin, Miami, Tampa, Charlotte, and Nashville. The high rates of entrepreneurship, rapid population growth, and business-friendly environments in the South all contribute to the high contractor utilization.

Contractors earn the most in tech hubs, but Minneapolis and Philadelphia are the most affordable cities for contractors to live.  

The top three cities with the highest average pay for contractors - San Francisco, San Jose, and Boston - are driven by their tech-heavy economies. Silicon Valley's tech companies in San Francisco and San Jose, along with Boston's strong biotech and healthcare sectors, create high demand for skilled contractors. This, in turn, leads to higher pay for contractors living in these areas who have the specialized skills companies are looking for. 

However, due to the relatively low cost of living and high earning potential, Minneapolis and Philadelphia are the most affordable cities for contractors to live. After considering the cost of living, contractors in Minneapolis make an average of $46 per hour, equivalent to $95,680 a year when they work standard full-time hours. In contrast, the high cost of living in New York City makes it one of the least affordable cities for contractors to live. After adjusting for the cost of living, the average contractor in New York City makes just over $20 per hour. 

More small businesses are going abroad for talent.

In addition to hiring contractors domestically, small businesses are increasingly going abroad to find great talent. From July 2023 to July 2024, the share of companies paying international contractors increased by 11%. The Communications, Technology, and Consulting industries have the highest share of companies paying an international contractor, with nearly 1 in 10 companies operating in these industries paying an international contractor.

Additionally, international contractors are becoming a larger part of the workforce composition of small businesses. For businesses that are already hiring abroad (have one international contractor on payroll), the ratio of international contractors to domestic employees has increased by 27% since July 2023. The typical small business with at least one international contractor now has one international contractor for every employee. With the rise of remote work making it easier to communicate with workers abroad and the speed of globalization continuing to increase, the increase in the utilization of international contractors among small businesses is unlikely to slow down in the near future. 

Methodology 

This report's data comes from anonymized payroll data from more than 300,000 businesses across the country. The contractor-to-employee ratio measures the number of contractors per employee at companies on the Gusto platforms. Hourly pay is calculated based on contractor payments for companies on the Gusto platform. Cost of living Cost adjustments are created using C2ER’s 2023 annual average cost of living data.