Hiring Contractors? Watch Out for These Red Flags.
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Episode Summary
In this episode of The Profit Pillar Show, Parker Stevenson, CEO of Evolved Finance and author of Profit Pillars, breaks down one of the most overlooked risks in online businesses: hiring contractors without understanding the legal, financial, and operational consequences. While contractors play an important role in many businesses, Parker explains why relying on them for core internal operations can quietly create compliance issues and growth constraints.
Drawing from over a decade of experience working with online business owners, Parker walks through how the contractor-heavy model became common and why many businesses eventually outgrow it. He explains which roles still make sense to outsource, such as accounting, legal, and specialized project work, and where business owners often cross the line by using contractors in ways that resemble full-time employees.
A major focus of the episode is contractor classification risk. Parker explains why employment laws vary by state, why states like California are especially strict, and how full-time U.S.-based contractors can expose business owners to audits, back payroll taxes, and penalties. He emphasizes that contractor preference doesn’t protect the business owner and why proper classification should always be guided by legal and HR standards.
Beyond compliance, the episode explores the operational side of hiring. Parker explains how employees often reduce turnover, improve efficiency, and preserve institutional knowledge compared to rotating contractors. He also challenges the assumption that employees are dramatically more expensive, explaining why the real cost difference is often far smaller and frequently offset by better productivity and retention.
Parker also discusses why time zones, benefits, and company culture matter more as a business grows. Building a stable team with shared working hours and long-term buy-in becomes increasingly difficult with contractors alone. If you want more stability, better team performance, and fewer operational headaches, this episode may change how you think about hiring contractors. Listen or watch to learn when contractors make sense and when employees are the smarter choice.
Important links from this episode:
Profit Pillars Book: evolvedfinance.com/book
Evolved Finance Services: evolvedfinance.com/services
Finance Tools and Courses: evolvedfinance.com/learn
Frequently Asked Questions
Here are a few common questions business owners ask around this topic:
One of the biggest red flags is having contractors who work full-time and function like employees. If a contractor works set hours, follows your internal processes, and is critical to day-to-day operations, they may legally need to be classified as an employee. This is especially risky for U.S.-based businesses due to state employment laws. Ignoring this red flag can lead to audits, penalties, and back payroll taxes.
A contractor should be classified as an employee when they are performing ongoing internal operations under your direction. This typically applies to roles that are not project-based and require consistent oversight. If the work is central to running the business and not tied to a defined deliverable, employee classification is usually more appropriate. A business attorney or HR expert can help confirm proper classification.
Misclassifying contractors puts the legal and financial risk entirely on the business owner. If audited, the business may owe back payroll taxes, penalties, and interest. It does not matter if the contractor prefers being paid as a contractor. State agencies evaluate how the work is performed, not personal preference.
State employment laws determine how contractors are classified and enforced. Each state has different standards, and some (like California) are much stricter. Even if contractors live in another state, your business location can still create compliance exposure. Understanding state-specific laws is essential for reducing risk.
Employees are usually only about 8–10% more expensive than contractors. While employees require payroll taxes and benefits, contractors often charge higher hourly or flat rates. Employees also provide greater consistency, productivity, and long-term value. For internal operations, the cost difference is often offset by efficiency gains.
Specialized or project-based roles are typically best kept as contractors. This includes legal services, accounting, bookkeeping, web development, and specialized technical work. These roles do not require daily oversight or long-term integration into operations. Using contractors for these functions maintains flexibility without increasing compliance risk.
Contractors are not designed to be fully embedded in company culture. They usually focus on completing tasks or projects rather than long-term collaboration. Employees build institutional knowledge and shared accountability over time. Strong culture improves performance, retention, and client outcomes.
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The Profit Pillars Show
The Profit Pillars Show by Evolved Finance gives online entrepreneurs and modern small business owners the real-world guidance and insights they wish they had sooner. Each episode delivers actionable, straight-to-the-point advice on finances, operations, and overall business strategy, drawn from host Parker Stevenson’s years of experience helping entrepreneurs build stronger, more profitable businesses.