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The Differences Between Independent Contractors and Employees

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The Differences Between Independent Contractors and Employees

Are you planning to expand your workforce and bring new hires on board? Well, take some time to think about the nature of your work requirements. If what you need is short-term, flexible, and independent work management – hiring independent contractors is your best bet. On the other hand, if you need a permanent addition to your workforce for more concrete, long-term, and supervised work, an employee is who you need to hire.

So, when should you hire employees or independent contractors? What are the differences between them? What are the pros and cons of hiring one over the other? 

The demand for independent contractors is increasing. There are around 31.9 million occasional independent contractors in the U.S. alone. Further, nearly one in five businesses are more likely to hire a contractor than a full-time employee. But is that what your business needs?

Read the article to know the significant difference between contractor and employee to make an informed decision.

What is an Independent Contractor?

As the name suggests, an independent contractor is a self-employed individual contracted to perform a specific task or provide services. They may be an independently working individual or an entity that works on a contract basis. 

You can seek them out to employ their skills and specialization on a specific task.

Contractors are more conducive and flexible. They can work for multiple companies simultaneously. Although it takes significant time and effort to get the business off the ground, the rewards often outweigh traditional employment.

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 lower greenhouse gas emissions. 

Who is an Employee?

An employee is an individual who works for your company for a long term in exchange for wages and benefits. They bend to your procedures and beliefs and execute tasks following your approach.

Employees do not frame their schedule and work hours; their employers do. They depend on the business for stable income, with little to no control and independence, and can avail themselves of certain benefits within workplace constraints.

Independent Contractor Vs. Employee: The Differences

By definition, the difference between independent contractors and employees lies in their terms— the former works on a contractual basis while the latter is long-term. However, there are many other aspects too. Some of them are mentioned below.

1. Scope of Work

You hire an employee to fulfill specific roles within your established organizational framework. Whereas a contractor is there temporarily to perform a particular task or for a particular project. The level of control over work is another vital difference between contractor and employee.

Employee Independent Contractor
An employee typically works according to the orders or directions of employers. An independent contractor has more liberty and control over their schedule and methods.
Employees often perform their work under the direct supervision of a manager. Contractors utilize their tools and work as per their will within the timeframe.
Employees adhere to your organizational guidelines and align their work with the broader objectives to develop a structured setup. Independent contractors comply with project-specific terms but have limited involvement in broader organizational policies.

This difference between an independent contractor and an employee underscores how they perform their tasks and interact with your business.

2. Compensation

Employees and independent contractors exhibit variations in their payment structure. The distinctions in how you compensate and financially engage with them have implications for workers and your organization.

Employee Independent Contractor
Consistent and predictable payment, usually on a bi-weekly or monthly schedule. Payment is contingent on project milestones or completed projects.
Their compensation may include bonuses, profit-sharing and overtime pay. Contractors negotiate compensation terms as part of their contractual agreement.
Employers withhold income taxes, Social Security, and Medicare from employees’ paychecks. Independent contractors are self-employed; hence, they file and pay their own taxes.

Remuneration for independent contractors depends on the terms stipulated in their contracts. It is often outcome-driven and centers around their ability to meet project objectives.

Meanwhile, the payment structure for employees offers regularity and potential additional rewards to appreciate their contribution. It fosters a sense of stability and motivation within the workforce.

3. Benefits and Protection

Employees and independent contractors experience notable disparities regarding benefits and protection. It extends to various aspects of their working relationship and influences their financial security and legal rights.

Employee Independent Contractor
Employers provide health insurance, paid leave, and retirement plans, among other benefits. Contractors source their own benefits, like healthcare and retirement plans.
Labor laws are a safety net for employees, ensuring fair treatment and protecting their rights. The contracting party does not provide legal protections and benefits to contractors.
The long-term relationship provides employees with more job security and stability. Independent contractors operate on a temporary project-by-project basis and may have less job security.

The benefits and protection create a supportive environment that addresses employees’ immediate needs and long-term security. Labor laws entitle them to various legal protections, like minimum wage laws, overtime pay, and protection against discrimination.

In contrast, employers do not provide benefits or protection to independent contractors. They are responsible for themselves and work within the definitions of the signed contract while adhering to specific requirements.

4. International Considerations

Globalized workforces are another factor adding to the differences in contractor vs. employee. Legal landscapes, taxation, and cross-border engagements impact how the two are treated across different countries.

Employee Independent Contractor
Employment laws vary by country and impact work hours and compensation. Different jurisdictions may have varying criteria regarding their rights, obligations, and contractual arrangements of contractors.
Employees are subject to the labor laws of the country they work in. Employees abide by the labor laws of the country they work in
Employees working across borders may face challenges related to visas, work permits, and compliance with immigration laws. International work requires contractors to navigate diverse legal and regulatory frameworks, including tax treaties and business registration.

These independent contractor vs. employee distinctions hold various legal and financial implications. This means they may vary depending on local regulations and arrangements between the involved parties.

Understanding and following international employment laws is crucial to nurturing a harmonious and legally compliant relationship. Further, ensuring compliance with local laws and regulations is imperative to prevent potential legal and financial issues.

How to Identify Between an Employee and an Independent Contractor?

While the difference between an employee and independent contractor is clear, there are times that they might be misclassified. 

Say you are considering hiring a temporary worker to assist with a project you have been engaged in for several months. This individual could be an employee, but the classification of contractor vs. employee hinges on various factors.

Although there is no one approach to classifying workers, these points will narrow down your process to correctly identify their status.

1. Examine the Contract

Analyzing the contract is crucial for identifying whether an individual is an employee or an independent contractor. It reflects the nature of the working relationship and the expectations set between the parties involved.

A good starting point could be to evaluate under which type of employment contracts the employment falls. For example,

  • Does the employment contract fit squarely into an independent contractor agreement?
  • Is it a part-time or a full-time employment contract?
  • Does it include a non-compete agreement?

Employees’ contracts often outline terms of employment and include benefits, work hours, job responsibilities, and salary. However, the one for independent contractors focuses on specific projects and details of deliverables, payment terms, and deadlines.

2. Look at the Work Relationship

The relationship you share with a worker also determines their classification. For instance, the IRS classifies a worker employee if they provide services related to your core business work. In addition, they would be considered employees if you grant them perks such as paid leave or health insurance.

Here are some questions you must answer to ascertain the working relationship:

  • Do you have control over what the worker does and how they do their job?
  • Do you control the business aspects of the job? It comprises arrangements such as who provides tools and equipment, whether you reimburse their expenses, and how the worker receives payment.
  • Does the contract include employee benefits like vacation pay, pension plans, and insurance?

Employees have a closer and ongoing relationship with you. They work under direct supervision and follow your protocols. Independent contractors typically maintain a liberal and temporary work relationship.

3. Consider Legal Obligations

The employer is subject to the deduction of taxes from the salary or wage of an employee. You must withhold a sum of their salaries for tax and Social Security. It is not the same for independent contractors. The employer does not withhold tax amounts from any of the payments.

Learning about legal obligations helps distinguish between a 1099 vs. W-2 employee

  • You must prepare a W-2 form annually for the employees. It lists their earnings, tax withholdings, and relevant financial details. 
  • Meanwhile, you would need a 1099 form when hiring independent contractors. It reports the income contractors receive.

IRS (Internal Revenue Service) automatically assumes a worker as an employee in case of unclear status. Hence, discerning and defining the precise business relationship is crucial to prevent unwanted surprises. Further, you must consider other factors besides the mentioned points, like local labor laws and industry norms, for precise classification.

Hire Global Talent Easily With Skuad

Selecting between an independent or IRS contractor vs. an employee is a decision that requires proper analysis of your plans, associated costs, and benefits involved. 

One way to overcome issues related to the misclassification of contractors or employees is by partnering with Skuad as your Employer Of Record (EOR) platform. 

Skuad’s unified platform empowers organizations to manage and care for a thriving, distributed workforce. It offers compliant hiring and onboarding in over 160 countries. Ready to build your global team? Book a demo to speak to our experts. 

FAQs

Q1. What happens if a worker is misclassified?

The risk of misclassifying an employee or worker can be severe. Companies may be vulnerable to lawsuits and liable for back taxes and associated penalties for late payment. Moreover, a company may need to compensate workers for lost wages and benefits.

Q2. What are the tax forms for independent contractors?

W-9s and 1099s are the necessary tax forms companies need when working with independent contractors. The contractor fills the Form W-9 to provide their legal name, Taxpayer Identification Number (TIN), or Social Security Number (SSN). Form 1099, however, contains details on the wages to the contractor. It is filed with the state tax authorities and the IRS.

About the author

Sandeep Patel is a Content Marketing Manager and Strategist. Over the last five years, he has created and managed content for global brands and fintech startups. He is passionate about remote work and using tech for a better work-life balance.

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