What You Need to Know About Contractors vs Employees

Before you decide which type of worker to use for a given role, it is important to understand the differences between contractors and employees and the consequences for misclassifying workers. After all, training any new worker requires time and funds — and these are two things small-business owners don’t always have an abundance of on hand. In fact, you may not even personally have the skills to train an employee in the tasks required for your business. For this reason, independent contractors tend to be the best choice if you need specific expertise for a project in a short period of time. Please note that the information contained herein is limited in scope and is only intended as an overview of the differences in reporting forms for independent contractors and employees.

• Non-exempt employees are covered under the FLSA and should be paid overtime pay.
• The chances of being audited are still slim overall, though — a less than one percent chance.
• We are not a law firm, do not provide any legal services, legal advice or « lawyer referral services » and do not provide or participate in any legal representation.
• Form 1099 reports payments over $600 or more in a calendar year.
• Learn which employees need in the future and predict your future hiring needs.

Although the IRS has no absolute definition of either the independent contractor or the W2 employee, they do have a 20-point checklist to determine employee status. Another disadvantage of IT contract work is a lack of connection with teammates, colleagues, and the company at large. While contract position vs full time regular employees build camaraderie and networks of support, contract workers can be left feeling alone and disconnected. Businesses are not required to offer health insurance to their employees, but this is typically a way for you to attract the most talented candidates in your field.

🛠️ Are they paid for the time they spend fixing their mistakes?

Who is considered an employee and who is considered an independent contractor ultimately comes down to the law, particularly tax law. For employers, it can sometimes be difficult to determine whether the person they have hired is an employee or an independent contractor, with the U.S. Department of Labor saying that nearly 30% of employers incorrectly classify workers. However, it is hugely important that employers figure this out accurately, as not doing so may result in payment of back taxes, fines, and worker reimbursement. For workers, accurately defining their work type determines whether they are employees protected under the Fair Labor Standards Act or independent contractors who are not under such protections. Hiring a contract worker rather than a full-time employee could save your business money; after all, you won’t have to pay for a contractor’s health insurance, 401 matches, vacation time or other benefits. However, choosing this option also comes with limitations and potential risks.

• If you work for yourself, you’re on the hook for all of your taxes.
• Instead of focusing on long-term loyalty, as they would for someone with employee status, many businesses prioritize a contractor’s niche expertise.
• On-call – generally confined to the emergency service sector.
• Some countries prohibit self-employees from working for only one client.
• As long as you deliver your end of the deal, partnering with a contractor can mean less red tape and cost-effective task completion.
• The best part of being eligible for a fixed income is that it allows you to plan since you’ll know exactly when and how much you are being paid.
• They can work extra hours by picking up shifts or doing additional work during busy times of the year.

Because independent contractors are considered self-employed, they must pay the federal government 15.3 percent for Social Security and Medicare, as well as any state or local taxes themselves. Classifying regular employees as contractors also gives businesses the freedom to evade minimum wage requirements and overtime mandates as well. Employee versus Independent Contractor comparison chart EmployeeIndependent ContractorIntroduction An employee works directly for a company or another person and answers to an employer/manager. May work for a company or another person (or multiple companies/people) and accept direction, but is more independent. Control Employer determines conditions of work and directly controls the actions of an employee. Varies depending on work conditions—whether working for self or under contract.

💻 Do they buy their materials and equipment?

When another client offers a better fee for the services being rendered, there isn’t a guarantee that your favorite contractor won’t leave you and go to your competitor for higher pay. Both parties agree on how the fee will be paid, but it’s usually paid at the end of the contract when all the work has been completed to the satisfaction of the business owner. Sometimes, a contract worker will request a deposit or a portion as a retainer. Most commonly, though, you’ll see an invoice from a contractor at the end of a project. Being hired full-time will require you to complete various job-related tasks on a consistent, daily basis. These tasks will be determined by your job schedule and the overall company organization, but it’s safe to expect you will have a more or less similar amount of work each day. As the name itself suggests, contract work is any type of work you sign a contract for.

This comes down to three factors – project management, time monitoring, and budgeting. The government has developed a special calculator to do this for you. Just input the hours – you can calculate them with Everhour – and see if you’re eligible to pay ACA. Less than 50 full-time employees or equivalents and you’re probably a Small Employer . Almost all types of work could be suitable for transfer to part-time roles. However, some of the most popular include health and social care, accounting, computer programming, editing, graphic design, waitressing, and more.