Hiring first person employee vs contractor

The first question to ask is what this person to do? Is it a simple job like cleaning the office or do you expect this person to be a key part of your organization?

A contractor will be running his firm as his top priority, not yours.

If, as a startup, you bring in your first employee and give him incentives like stock options with vesting provisions then he will be motivated to insure that you succeed.

So first decide what level of dedication, commitment and performance you want. Then how to compensate that person will become a much easier decision.

Another key consideration is that the IRS has strict rules and criteria for determining if a person is acting as an employee or an independent contractor. Here is IRS guidance.

If you pay someone as an independent contractor and it is later determined that they were performing as an employee you could be liable for substantial taxes and penalties, so be careful.

I can tell you that often when major corporations wish to hire an individual as a short-term contractor for a project they will insist that that person either have his own company and provide an EIN for the company along with proof of insurance etc or that employee work through an agency that pays him as an employee. They are just not willing to accept the risk of contracting directly with an individual.

You may want to also see Hiring someone as an employee AND contractor.

There are many forms that you will have to do when hiring an employee:

I-9, W-4, then at the end of the year you will need to issue a W-2 form. Then on the corporate level you will have to set up payments using IRS 941 and a good accountant or a payroll service to figure out how much you actually will need to pay in taxes.

There is also Employee Handbook, etc. I would suggest talking to an accountant to see how to set up your payroll.

Now as far as Contractor is concerned you will need to get the contract worked out, like the Statement of Work, contract duration, invoicing, and pay schedule. At the end you may need to issue the contractor a 1099.

Now there are also restrictions on whether or not you can hire a contractor if you are a Hedge Fund for certain positions, and as @JonnyBoats pointed out the contractor will run his business first.