Independent Contractors vs. Employees: Key Differences You Should Know

Businesses are now looking beyond the traditional hiring process with workers on a payroll. Instead, they hire independent contractors. And why not? There are many reasons for companies to seek facilitation in business workflows to gain better results. 

The Internal Revenue Service reminds business owners that tax-reporting rules for an independent contractor and for an employee vary widely. This is why you should learn about these two categories of workers to mitigate different risks, including tax-related blunders, and guarantee that your workers are being compensated fairly.

So, what’s the difference between an employee and a contractor? This article will help both workers and employers understand the differences between the two and help you understand which route you should take. 

What Is an Employee?

An employee is a worker your business hires to perform one or more roles in your company. At the time of hiring, the employer (your company) will lay out their responsibilities, working hours, and the location where the employee will be expected to work.

Employers often withhold taxes for an employee. Workers are also protected by the law and can expect to receive benefits, including paid time off.

What Is a Contractor?

An independent contractor is a business owner or professional you can hire to perform certain tasks or responsibilities. Unlike a full-time employee, they can work with multiple companies and, at times, even choose their hours of service.

Independent contractors do not receive any employment benefits such as paid medical leave or health insurance from the employer and are responsible for filing their own taxes.

Contractor vs. Employee: Main Differences

Now that you have a basic understanding of the two types of workers, let’s take the ‘contract worker versus employee’ debate further by explaining the main differences between them and which category of workers would be better for your business.

Payment, Taxation, and Benefits

The key difference between contractors and employees you should be aware of is the way they are paid and taxed.

The fees for independent contractors are mutually decided between the hiring entity and the worker during contract negotiations. The employer transfers this sum before or after the task that the contractor was hired to do is complete ‘ this concludes the working relationship between the two parties until the next hire.

And since the agreements cover only the task and the compensation for it, employers do not have to worry about providing health benefits or withholding taxes. The contractor will be responsible for paying state, federal income, and self-employment tax, and even taking care of all aspects of taxation for the business they own.

Employees, on the other hand, may have additional benefits including but not limited to paid vacation, stock options, and more. Since taxes are also withheld by the company, employees only have to file their tax returns in order to remain compliant.

Independence

Employees are often expected to work for certain hours during the day. Certain terms pertaining to their availability are discussed and agreed upon at the time of hiring.

Independent contractors enjoy a lot more flexibility and are only expected to complete the tasks they were hired for. They can decide on their own working schedules and generally don’t have to be available at any fixed times.

Say you are hiring an independent contractor to create and execute a marketing campaign. They can complete the task and share their findings with you at the end of, say, a month, without being available from nine to five each day. 

Learning and Development

This is another major difference between employees and contractors. Employees often go through extensive onboarding and training programs, ensuring that they’re aware of multiple aspects of the business and the way it operates. In fact, according to one report, 94% of surveyed employees would stay at a workplace if it contributed to their learning.

Conversely, since contractors are only hired for specific tasks or responsibilities, they are generally only provided with the information needed to complete the task without any hindrance.

Hiring Goals

Since contractors are not regular payroll employees and are not provided with the same kind of benefits, they work to get done with the task at hand and move on to the next job. Employees, on the other hand, put in the effort to work their way up and are expected to be more loyal to the company.

ContractorEmployee
Payment and TaxationContractors are responsible for their own taxes. They are paid according to a task and are not on a company’s payroll. Employees are on a company’s payroll, and their taxes are withheld by the company. 
IndependenceContractors can decide on their own schedules and work for multiple clients simultaneously.Employees are often required to follow instructions and need to be available for certain hours every day.
Learning and DevelopmentContractors do not have to go through any intensive training programs. They are responsible for developing their own skills. Employees go through long onboarding and training processes.
Hiring GoalsContractors are hired for specific tasks.The responsibilities of an employee may change over time, but they are expected to show some loyalty to the company. 

Why Specialists Opt for Being a Contractor or an Employee

This is an essential question that often comes up in the ‘contract worker vs. employee’ debate. Let’s probe further to help you decide which option would be better for you.

Financial Aspect

At first glance, it may seem like employees are at a clear advantage with lower tax rates and benefits that come as part and parcel of being an employee. But did you know that independent contractors can write off costs, such as lunch with clients, and a portion of their rent (if they have a home office) as business expenses?

That said, while an employee’s major expenses for the job may comprise the money spent on the commute (hello, work from home!) and business attire, an independent contractor will have to worry about setting up their business and completing any certifications that may be necessary.

Business Aspect

All intellectual property ultimately belongs to the company the employees are working for. This is why it’s essential for the workers to take care that any private company information is not spread to irrelevant personnel.

While independent contractors can be expected to sign NDAs, they generally retain the right to any intellectual property. As a result, independent contractors can use the work they have done for one or more clients in their portfolios.

Personal Aspect

Employees may enjoy the office friendships and sense of belonging that comes with working in a company along with several other people. Independent contractors may not have this kind of benefit, but being their own bosses and creating their own benchmarks makes up for it.

Additionally, working as an employee might be easier because of the environment they are exposed to. As an independent contractor, however, you will have to find your own motivation, as you will probably be working outside of the office. Being the latter means you can work with several companies simultaneously, so you have a higher chance of understanding how the industry operates and how different organizations tackle common challenges.

What’s Better for the Company?

Deciding whether to hire a full-time employee or an independent contractor can be tough. Here’s a business perspective to put the ‘contractor vs. employee’ debate to rest.

Pros of Hiring a Full-Time Employee

Hiring an employee means you can train individuals according to the values and requirements of your company while streamlining idea generation and execution for more efficient processes. They tend to stick around at a company for a long period of time, so you won’t have to worry about explaining processes and procedures from scratch every time there is a new task at hand. 

What’s more, happy employees can even serve as ambassadors of your organization by showing it in a positive light. Needless to say, this kind of publicity can go a long way.

Cons of Hiring a Full-Time Employee

Since employees are on your payroll, you have to pay them until they resign or are terminated. This means that if your business is going through a rough patch, you will still have to allocate a fixed amount for salaries.

You can also expect a dip in productivity during the holiday season, as most employees will either be out for a few days or just not be in the mood to work as hard amidst the festivities.

Pros of Hiring an Independent Contractor

Independent contractors often specialize in a particular niche and have very specific skill sets, so you’ll be able to find a worker who can complete a task from start to finish. Since they work at their own pace and schedule, you won’t have to train or follow up with them repeatedly.

Hiring an independent contractor also means you’ll save money on additional benefits, such as health insurance. An independent worker will come with any required licenses and will deal with all taxation issues on their own, saving you the hassle of finding and paying a CPA too.

Cons of Hiring an Independent Contractor

Like everything else in life, there are a few drawbacks to hiring an independent contractor instead of an employee. Often, you won’t have much control over how tasks are being performed, and you’ll only find out about any progress at fixed reporting intervals ‘ say, at the end of every week. This means you won’t be able to provide feedback in real time and will have to adjust to this limited visibility in the working process.

On top of that, since an independent contractor will not be working solely with your company, they probably won’t go out of their way to promote your business, as it brings them no direct benefit.

Hiring an EmployeeHiring a Contractor
Pros You can streamline idea generation and execution.Contractors are very skilled in a specific niche.
ConsEmployees need to be paid at fixed intervals until they resign or are terminated.You do not get as much visibility in the working process of a contractor.

How to Streamline the Hiring Process

Whether you’re looking to hire an independent contractor or an employee, one thing is for sure: having a proper recruitment strategy in place can make the hiring process smoother for both you and the worker. Here are some tips to help you streamline the process:

Write a Rigorous Job Description

Contrary to popular belief, the more descriptive your job description, the better. By writing thorough job descriptions and clearly mapping out all the requirements, you can save time you would spend reviewing countless irrelevant applications and find the right candidate more easily.

Standardize Background Checks

Performing background checks is an important part of the hiring process. Creating a system to standardize background checks is your best bet when hiring new workers. In addition to looking into their criminal records, you should also make it a practice to contact any candidate’s references and get more insight from them.

An easy option would be to outsource this task to an agency so you can absolve yourself of the minor aspects of the hiring process.

Automate Contracts

Sifting through dozens of applications and compiling documents for each job post can be difficult and overwhelming. This is why you should look into automating contracts with tools like AXDRAFT to make the process simpler for both yourself and the candidate. These tools are designed to save time, reduce the workload of hiring teams, and accurately create contracts for both contractors and employees.

Conclusion

Hiring both employees and contractors has its pros and cons. For instance, if you hire an employee, you can have more visibility into how your teams operate, but you’ll have to deal with payroll and taxation-related matters for each one of your employees. Conversely, if you hire a contractor, you may not have to worry about taxes as much, but you’ll sure have to work around the limited visibility and insight you get into the process they follow to complete  a task. 

Regardless of the type of worker you hire, though, remember to create a rigorous contract that lists all the terms so that both parties are aware of their rights and obligations. This way, you can mitigate the risk of legal issues and ensure an optimized hiring process.

FAQ

What is the difference between a contractor and an employee?

Employees are on the payroll of a company and are entitled to benefits. Contractors decide their own work terms and schedule and pay their taxes by themselves.

Is it cheaper to have an employee or a contractor?

To answer this question you have to factor in many details, but hiring a contractor saves you the costs incurred for additional employee benefits.

Why are contractors better than employees?

Contractors come with specific skill sets and are often able to complete tasks without any additional training or supervision.

What are the disadvantages of being a contractor?

Being a contractor means you’re responsible for paying taxes yourself. Moreover, you do not receive benefits or paid leave.

Stay in touch!
Subscribe to our newsletters

    Leave a comment