Employee vs Independent Contractor: What’s the Difference
Let’s assume you need an expert designer, copywriter, or another professional degree holder to complete specific tasks for your business needs. A decade ago, everyone considered the employer/employee model the only right business choice. However, lots of things have changed. Flexible workers, such as independent contractors, are not a backup business plan. Today, flexible employment makes up 30 percent of the workforce across different industries, and the tendency is likely to increase.
Still, such a widespread inclusion of flexible workers is comparatively new. As a business owner or manager, you may ask yourself: “How to be sure hiring an independent contractor is the best solution for my business?”
The answer will depend on your business needs.
Before deciding whether to stick to the employer/employee model or hire an independent contractor, you need to know the differences and all the nuances that may arise. It will help prevent all potential business risks and ensure you make the right choice from the long-term perspective.
What Is an Independent Contractor?
Although the initial dictionary meaning of independent is “free from outside control” or “not subject to another’s authority,” this is not 100 percent true regarding an independent contractor.
An independent contractor is a professional degree holder (expert in a specific field) who provides services to a client per the contract’s terms and gets the payment on a freelance basis. The contractor operates independently and uses the expertise, tools, and equipment needed to complete the assigned work. Unlike full-time employers, independent contractors are usually responsible for both the individual and employer sides of taxes.
Yes, independent contractors are usually free from any control or influence of the client. They can apply judgments about the manner and method of completing the task to achieve the best result. So, a signed contract governs what the work is rather than how to execute it.
However, independent contractors have limits through a contract with the employer. Also, independent contractors are 100 percent responsible for the project’s outcome. This employment model might be the best solution if an employer looks for experts to provide services for short-term needs and avoids bringing employees on staff for specific reasons.
The difference between independent contractor and a freelancer
Independent contractors are often mistakenly called freelancers. However, the terminology is different between these two types of flexible employment: All independent contractors are freelancers, but not all freelancers are independent contractors.
Unlike freelancers, independent contractors offer exclusivity of their work to a single client until they complete the contract. Contracts mean the person must offer exclusivity, especially if it is mentioned in the contract. Also, independent contractors usually work on a more long-term basis for a specific client, while freelancers work on short-term projects.
Examples of independent contractors
Freelance writers or graphic designers commonly work as independent contractors for long-term projects. The agreement outlines their work products, which they execute in a way they define. After they finish the work, the client pays money according to the agreement. They have autonomy even though they are legally obligated.
Independent contractor agreement: recommendation or necessity?
Rule number one: Never start an employer-contractor relationship without the independent contractor agreement. It’s necessary to have a fully executed contract or agreement to begin work on your company’s behalf.
The independent contractor agreement template is your must-have “safety cushion” to be in good standing. It outlines the work products in an agreement, ensures safe cooperation for both parties, and addresses potential business and financial risks. You can find this template in legal templates and just fill in all the necessary information. So, you can save time and ensure no details have been missed.
Note: It’s no small matter! Many employers feel confused when classifying their workers as employees or independent contractors, and this confusion leads to huge risks. Misclassifying employees as contractors is a critical mistake controlled by federal and state laws, so government agencies take it very seriously. Potential penalties are significant.
So, the main takeaway here? A well-drafted document is your peace of mind.
What Is an Employee?
An employee is a person who works for an employer and provides services on a regular basis and gets a fixed payment called salary or wages. While a contractor operates independently, the employer dictates and controls the employee’s work, including the working hours and location of work. The worker is an employee if the employer hires them for a specific job based on his or her specialization, and each specific job has necessary tasks, duties, responsibilities, and authorities.
Unlike an independent contractor, an employee receives the legal benefits of a W-2 employee.
Can an employee be an independent contractor?
No, this is the common mistake employers can make. The employees’ earnings are not subject to self-employment taxes. You can ask the advice of consulting services (law firms or solo practitioners) for every specific case to stay protected and define the type of employment correctly.
Contract of employment
Just as in the case of flexible employment, an employment contract is necessary for the employer/employee model. It can be either oral or written. However, a well-drafted written contract with all the responsibilities for both parties can significantly benefit employer-employee relationships.
Employee or Independent Contractor Comparison Chart
This employee vs contractor chart will help you to understand the key differences between employee and contractor:
|Basis for Comparison||Independent Contractors||Employees|
|Duties||Are responsible for performing only those services that have been outlined in a contract||Are responsible for a wide variety of duties and tasks being assigned on a regular basis|
|Tax Forms||Are responsible for paying self-employment (SE) tax, which includes both the employer and employee halves of Social Security and Medicare (FICA).||Their earnings are generally not subject to SE tax. However, their earnings are subject to FICA and income tax withholding. (Employers usually take the needed amount out during payroll, including the amount needed for health insurance).|
|Income||Earn a definite fee for provided services.||Earn either an hourly rate or a weekly/monthly salary (adequate consideration). Overtime pay is also included according to the contract. |
|Pay period||Payment can be for an hourly, daily, or weekly amount that ends on a specific date mentioned in a contract (or a total amount of money to be paid when the task is complete).||Pay period remains unchanged (varies from one week to one month). Employees normally receive payment on fixed payment date or earlier (in the case of automatic deposit).|
|Employment laws||Not protected by employment and labor laws and is not subject to unemployment insurance.||Protected by a number of state or local government and labor laws (that also address minimum wages and health benefits).|
|Flexibility of schedule||Are free to opt for the working hours/days, but the contractor must complete the work successfully by the end date.||Employer decides the hours and days of work.|
|Requirements for report||Don’t have to report the progress in stages while working on a project unless specified in the contract.||Should provide regular written or oral reports on the status of work, per the employer’s request.|
|Work for multiple companies||Are more independent and can simultaneously provide services for several unrelated companies if it does not disrupt one’s work agreed upon in the independent contractor agreement.||Can work full-time only for one company and are not allowed to take other offers without notifying employers. Any additional work cannot be on company time and with no conflict of interest.|
|Hiring practice||A contractor normally interacts with a person or department that looks for a person to complete the needed task. A contractor usually completes a proposal and, after being chosen, enters into a contract.||An employee completes an application given by Human Resources. If HR approves the application, the applicant receives a job offer.|
|Tools/materials||Use independently obtained supplies or tools.||Use company-provided equipment, tools, and materials they need for work.|
|Training||Have no training and already has enough expertise to complete the assigned work independently.||Get ongoing training and supervision.|
|Relationship||Relationship with a client has limits and looks like a business relationship.||Communicate with an employer on a daily basis.|
10 Key Differences Between Employee and Independent Contractor
So, as the comparison chart shows, there are ten most important differences between a contractor and an employee:
- Scope of responsibilities
While an employee’s job may encompass a variety of duties and tasks that may change on a daily basis (as long as they do not violate the contract and correspond with the employee’s expertise), an independent contractor’s responsibilities are limited only to those that were initially mentioned in the independent contractor agreement (Scope of Work provision).
- Training and education
While employees are more limited to performing tasks in a defined manner and receive continous training to do so (in most cases), an independent contractor does not receive the training and already brings specialized expertise and the needed educational background to perform the work successfully.
- Payment details
Unlike an employee who earns a weekly/monthly salary (and is eligible for worker’s compensation) and has a fixed payday or earlier, a contractor earns a definite fee for provided services or a total amount of money when they complete the task successfully.
- Work for multiple companies
While an employee can work full-time only for one company and may not accept other job offers, which conflict with the full-time employer’s business, a contractor is more independent and simultaneously provides services for several unrelated companies if it does not disrupt the agreed-upon work in the independent contractor agreement.
- Delegation of tasks
While an employee is responsible for a variety of tasks that can be delegated on a daily basis, a contractor is responsible for performing only those services outlined in a contract.
- Job conditions
Theemployee needs to work according to the schedule chosen by the employer and at a specific location. Unlike the worker’s job conditions, a contractor independently decides the time and place for completing the work.
- Relationships with an employer
While an employee has a continuing daily relationship with the employer, an independent contractor has a short-term relationship with the client and does not usually communicate often while completing a project. (It’s more a business-to-business type of relationship.)
- Required taxes
For the employee, the employer usually takes the needed amount out of the employee’s salary during payroll that is needed to cover income taxes, Social Security, and Medicare. Also, the employee’s earnings are not subject to SE tax. The company does not withhold taxes while working with an independent contractor since the person is usually responsible for paying self-employment (SE) tax, which includes both the employer and employee halves of Social Security and Medicare (FICA). Consequently, independent contractors usually own tax management programs or use a really good tax person.
- Employment and Labor Laws
Employee status protects a person with employment and labor laws. Employment and labor laws do not apply to independent contractors.
- Resources and extra expenses
The company provides employees with the needed tools, materials, and equipment, even the pens and sticky notes needed to complete the daily work. The independent contractor uses his own resources required for work and is often responsible for the extra expenses. (It depends on the contract.) Note that the amount of the contractor’s investment in facilities and equipment can be a determination of whether there is an employment relationship. If the contractor uses even so much as a photocopier or the employer requires the contractor to work on company property, the IRS can consider the person an employee. (The IRS doesn’t mess around.)
Making a choice between two types of workers can be much easier if you understand the difference between employee and contractor (flexible and traditional models). For sure, both have their pros and cons. Also, the selection is much easier if you know your business priorities and strategy so you can understand which type of professional assistance can suit you better. Complete your own cost-benefit analysis “independent contractor vs employee” to come up with an adequate choice based on the difference between independent contractor and employee benefits.
Also, no matter who you decide to go with, make sure your relationships are legal with a work contract or an independent contractor agreement so everybody is on the same page and free from the risk of worker misclassification, penalties, and even lawsuits. Even for those who have an independent business or are small business owners, the properly drafted independent contractor agreement is must-have protection.