If you were just to observe an office where an independent contractor and an employee were working side by side, you\u2019d be hard-pushed to see any difference between them. Both would be typing at computers, going to meetings, and using the bathroom. <\/p>\n\n\n\n
Even so, they\u2019re not the same. There are both practical and legal differences between them. <\/p>\n\n\n\n
In this post, we ask: Independent contractor vs. employee \u2013 what\u2019s the difference? We then explore the pros and cons of each and some of the penalties you might face if you classify workers incorrectly. <\/p>\n\n\n\n
Employees are defined as workers on the company\u2019s payroll who receive regular wages and benefits in exchange for loyalty to the organization. An employee, for instance, can\u2019t work for both Citigroup and JPMorgan at the same time. They must also adhere to company guidelines, including all of the stipulations in the employee handbook<\/a>. <\/p>\n\n\n\n Contractors, on the other hand, are independent workers who get paid for completing projects. They don\u2019t receive any perks or benefits (besides their pay), and they are not on the company payroll<\/a>.<\/p>\n\n\n\n Contractors usually run their own legal business entities, such as limited liability companies<\/a>. Organizations buy their services \u201coff the shelf,\u201d as and when they need them. If the contracting company sees fit, it can simply cancel them without having to offer any redundancy pay or advanced notice.<\/p>\n\n\n\n Contractors sign contracts with businesses hiring them. These set out what the company expects, the deliverables, and how long the work will go on for. Contracts can be short-term, lasting just a few weeks, long-term, or indefinite, depending on the underlying brand\u2019s business model.<\/p>\n\n\n\n Businesses often hire contract workers because it\u2019s cheaper than taking on full-time employees. For instance, when companies hire gig workers, they don\u2019t have to pay health insurance, vacation time, 401(k) contributions, or any other benefits. They just pay the fee that the contractor asks for. <\/p>\n\n\n\n In this section, we explore the differences between employees and contractors.<\/p>\n\n\n\n Companies pay employees and contractors differently. As discussed, employees are on the company payroll and typically receive either a fixed monthly salary or a figure determined by their hourly rate of pay.<\/p>\n\n\n\n Contractors, on the other hand, aren\u2019t on businesses\u2019 payroll. Instead, companies pay them in a similar way to how they might pay a vendor by making a bank transfer or sending them a check in the post. <\/p>\n\n\n\n There are also differences when it comes to taxes. Firms tax employees on behalf of the IRS by automatically deducting anything they owe from their paychecks. They then provide breakdowns of taxes paid (such as Social Security, Medicare, and federal income tax) on the pay stubs they hand out to employees at the end of the month. <\/p>\n\n\n\n Sole proprietors and partners, on the other hand, must pay contractor taxes independently, according to federal law. Companies they work for don\u2019t pay or hold any taxes on their behalf. As such, gig workers are entirely responsible for paying their own taxes<\/a> (though, in most cases, they hire accountants to do it for them). <\/p>\n\n\n\n Benefits are another point of departure. Employees typically receive financial and nonfinancial perks as part of their pay packets. Employers, for instance, might make contributions to their health savings accounts, health reimbursement accounts, or flexible spending accounts or offer them free gym memberships, company cars, and so on. <\/p>\n\n\n\n By contrast, contractors don\u2019t receive anything other than their agreed-upon wage. If they want any of the above perks, they must buy them themselves. <\/p>\n\n\n\n Companies hire employees and contractors for different reasons. The main motivation for employing a worker is to gain their loyalty and leverage their skills daily, long-term. The reason for this is simple economics: It\u2019s expensive for firms to continuously go to the market and hire the skills they need on a job-by-job basis, so bringing someone in-house cuts costs. <\/p>\n\n\n\n On the other hand, firms typically hire contractors when they require their niche expertise for a particular project. For instance, it\u2019s common for contractors to work for firms for a couple of months and then leave once they obtain certain milestones. <\/p>\n\n\n\n Furthermore, contractors have less loyalty toward the companies they work for because they\u2019re always on the lookout for the most lucrative projects. <\/p>\n\n\n\n Employees have a single employer (unless they have a side gig) and are subject to their employer\u2019s rules. Contractors, on the other hand, work for many firms, either concurrently or sequentially throughout the year, depending on the type of work they do. <\/p>\n\n\n\n Of course, there are independent contractor pros and cons associated with this. On the plus side, they can take time off work whenever they like. However, if they do, they won\u2019t get paid, which is a negative compared to a \u201cstandard\u201d employee.<\/p>\n\n\n\n As you might expect, there are also significant differences in training and onboarding between independent contractors and employees. Contractors, for instance, don\u2019t get much (if any) onboarding at all. That\u2019s because they\u2019re not joining the company long-term. Employees, on the other hand, may receive long on-ramps that introduce them to every aspect of the business, including the culture, hoping that they will stick around for the long haul.<\/p>\n\n\n\n Training is also different. Companies expect independent contractors to arrive with fully-fledged skills right off the bat, whereas they may view employees as more of a work in progress, offering professional development as a job perk. <\/p>\n\n\n\n Lastly, there are significant differences between the level of autonomy afforded by regular employment and self-employment contracts. <\/p>\n\n\n\n Employees must perform work according to the instructions of the employer. For contractors, it\u2019s different. Firms assign them projects, but it\u2019s entirely up to them whether they take them on or not. Moreover, companies tend to exert less control over where and how the project is completed. Contractors, for instance, don\u2019t have to turn up at the office at set hours or dedicate certain times of day to particular tasks.<\/p>\n\n\n\n The IRS looks for specific factors that indicate whether someone working for you is really an employee. Therefore, it\u2019s critical to get the distinction right. If you don\u2019t, the IRS or workers may take legal action against you.<\/p>\n\n\n\n Here are the questions that\u2019ll point you in the right direction:<\/p>\n\n\n\nIndependent Contractor vs. Employee Checklist<\/h2>\n\n\n\n
Pay and Taxes<\/h3>\n\n\n\n
Reasons for Hiring<\/h3>\n\n\n\n
Employment Flexibility<\/h3>\n\n\n\n
Training<\/h3>\n\n\n\n
Autonomy<\/h3>\n\n\n\n
Classifying Workers<\/h2>\n\n\n\n
\n