Hiring a Bookkeeper: When is a Contractor Cheaper Than An Employee?
Many of us are working for ourselves and doing all of the work. As Michael Gerber says in the book The E-Myth Revisited until we hire people to do some of that work, we don’t own a business; we own a job. Personally, I’m fine if Michael tells me I own a job, as I enjoy being a solopreneur. However, in many cases, it’s going to make sense to get help.
If you are a bookkeeper, you may want to hire another bookkeeper to handle the client work, giving you more time to grow your business.
This advice is just as relevant for a solopreneur or a small business owner looking to outsource some of their billable work. The examples I’m using today are meant to compare the cost of a new hire in a billable role. So just replace the word “bookkeeper” with “designer”, “plumber”, or whatever service you sell.
We’ll discuss the pros and cons of hiring admin staff another day.
Hiring a Bookkeeper
First, let’s handle the disclaimers. There are certain situations where the answer is obvious or has been chosen for you.
When you need to hire a bookkeeper as an employee.
There are situations where you have to consider a new hire an employee. Your state, province, or planet may have specific rules about who can be considered a contractor vs. who must be considered an employee.
Each location has its rules, but certain aspects of the work arrangement affect the recommendation. As an employer, you need to ask yourself:
- Do I control when and where the work is completed?
- Do I own the equipment that is used to perform the work?
If both of these answers are “yes”, they will probably need to be considered employees. However, it’s not always that simple. For example, I know California has pretty strict laws regarding employment status. Even if you answer “no” to both of these questions, you may still be required to hire them as an employee. I suggest asking your accountant so you are sure you are in compliance with your local regulations.
When you need to outsource your bookkeeping to a contractor.
Assuming your rules don’t prevent it, there are situations when using a contractor always makes more sense. These will relate to volume and location.
If you’re working with someone in a different country, it’s much easier to contract the work. You can hire international employees by using an EOR (Employee of Record) or PEO (Professional Employer Organization). That’s a big topic, so let’s cover that in a separate post.
Also, if you don’t have a lot of work to outsource, it makes sense to use a contractor. The exception here is if you think the work will expand very soon. If you only have 2 hours per week to outsource, but it may grow to 20 hours per week in a couple of months, then maybe hire a part-time employee. Otherwise, use a contractor. You can always offer them a part-time or full-time role later.
When it’s not an obvious choice, let’s look at the numbers.
Yes, this is where I will use a spreadsheet. If there aren’t laws or personal preferences making the choice for me, I tend to lean on what the numbers tell me. Plus, I enjoy running scenarios through a spreadsheet. Does that make me weird? Please don’t answer that.
Scenario:
You need help handling some of the extra bookkeeping so you can grow your bookkeeping business. You estimate the role will be 30 hours per week and will be done remotely. You’ve read through your local laws, and an employee or an independent contractor could fill the position.
If you hire a full-time employee, you would be paying them a salary of $62,400. That works out to $30/hr for your typical 2,080-hour year.
You’ve looked around, and a bookkeeping sub-contractor will charge you $45/hr for the same type of work.
Round One: bookkeeper salary vs independent contractor hourly rate.
You start by making the initial comparison. You could either pay an employee $30/hr or a contractor $45/hr for the same work. Even if you weren’t a bookkeeper, you know that $45 is greater than $30, so it’s a no-brainer, right?
Round Two: Payroll taxes and employee benefits.
Then you realize you’ll have to pay taxes and benefits. And, since you’re so generous, you’d want to buy your employee a new computer. Oh, and you’ll need to add more licenses to the software you use.
Ok, you’re going to do some severe rounding and estimating here for two reasons.
- You just want a rough idea of how much the employee will cost.
- You are a figment of my imagination, and I don’t know the tax rates where you live.
Let’s say your share of the payroll taxes is 10%. I know; this is either way too low or high, depending on where you’re reading this.
You will contribute $250/m toward their health plan and do a 4% match on their retirement plan.
So that’s:
10% of $62,400 = $6,240
$250/m x 12 months = $3,000
4% of $62,400 = $2,496
Sweet laptop = $2,500
Additional software licenses = $300/year= $14,536
If we add that to the salary, we’re now spending $76,936. Divide that by 2,080, and we get…
$36.99/hr
Well, ok, that’s still lower than the contractor. Once again, we’re back at this being an easy decision.
At this point, a lot of people stop calculating. However, since many of my readers are bookkeepers, you may have spotted the other issue.
Round Three: Staff Utilization
Remember what I said in the scenario description? You needed 30 hours of billable work done each week.
One big difference between being an employee and being a contractor is what you get paid for. Think back to the last time you were an employee. How much of your day was spent on billable work for your employer? I guarantee it wasn’t 100%. You’re in meetings, you’re checking email, or you’re staring off into space wondering what bad decisions got you here.
If you’re a contractor, you can’t bill the client for that time. This is another reason I’d recommend not billing by the hour, but I covered that in another post. As such, the contractor you use is 100% billable.
If you’re getting 30 hours of billable work from your employee, they’re only 75% billable. In reality, 75% is generous, but we’ll use that for today’s scenario.
So what? Well, now you have to do another calculation. You’re not paying for 40 hours, are you? According to your employment agreement and the paystubs you are, just not according to the amount of work getting done each week.
2,080 hours a year is 40 hours per week x 52 weeks. (I know, 2 of those weeks are usually paid holidays...just follow me anyway) This is the new calculation if you’re getting 30 hours of work per week.
30 hours per week x 52 weeks = 1,560 hours. Now we need to go back to that salary calculation.
$76,936 / 1,560 hours = $49.32/hr.
What? Now the employee costs more per hour than the contractor.
That extra calculation made the decision a bit harder, didn’t it? Now, at least on paper, it’s cheaper to use a contractor. And that’s with 75% utilization. If your employee is only generating 20-25 billable hours per week, a contractor is even cheaper.
Final calculation
So does this mean I don’t think you should ever hire employees? Of course not.
I used the example above to explain where people can make flawed assumptions. This scenario shows that financially, it’s cheaper to outsource. Another scenario might show the opposite result. My advice is to not make a quick calculation and jump to conclusions. We bookkeepers always obsess over our client’s numbers, so don’t skip that step in your own business.
The point here is to make sure you look at this from every angle. In this case, every financial angle, but there are also dozens of non-financial reasons to choose one or the other. Those will be a topic for another post.
Until then, let me know if you’ve had to make a recent hire. How did it go for you? Did you run into issues you hadn’t planned on?
Finally, if you’d like to make sure you see the next post as soon as it arrives, please consider subscribing to the free newsletter. Until then, stay safe, and have a great week.
