Contractor Vs Employee: What’s the Difference?

Are you confused about the difference between an independent contractor and an employee?

It’s important to know the differences between these types of workers. This distinction affects how much tax you pay, what benefits your workers receive, and even whether they can join unions. You need to make this distinction every time you hire paid help so that you don’t get in trouble with the IRS later on.

This guide will show you exactly how to determine if someone is an independent contractor or not. By the time you’re finished reading, you’ll feel confident when making this important decision.

Here’s What We’ll Cover:

Most Important Differences Between a Contract Worker and an Employee

When Is a Contractor an Employee?

Key Takeaways

Most Important Differences Between a Contract Worker and an Employee

Hiring new help is a key aspect for any business owner. There are right times and wrong times to hire a staffed employee versus a contractor. There are some key distinctions between the employee status of  a contract worker and an employee that you can use to make that choice.

Full-Time Employees Offer a Long-Term Relationship to a Business

They are consistent and predictable. Full-time employees usually receive a salary and benefits such as sick days, pension plans, vacation time, and health insurance. An employee will typically work full-time hours every week and contribute to social security through their paycheck. 

They stick around for years or even decades with a single employer. This gives you a degree of control and reliability. It’s important to build a good employment relationship. Employees can be very expensive, especially if they receive a salary and employee benefits. The business is also responsible for the unemployment insurance of employees.

A Contractor Typically Gets Paid By the Job

They’re temporary workers that come in when you need them. Some contractors work on specific, one-time projects while others might work for a longer period of time or repeatedly for a company.

Contractors usually charge an hourly rate based on the job that needs to be done. They don’t receive a salary, but they often charge more per hour than full-time employees. Contractors often have specialized skills that are only needed briefly. 

Contractors have a direct impact on your business. This is especially true if you only need them for a short time or sporadically throughout the year. That means it’s easier to lay them off if you no longer need their help.

Contractors are expensive, but they allow you to save money in the long run by avoiding having them on your payroll year-round. This helps reduce your payroll taxes. They are responsible for their own income taxes.

If you hire contractors, it’s even more important that they maintain a separate business with their own clients. This is because businesses have restrictions when hiring someone who is already working for the competition.

Intellectual Property Issues for Contractors

One of the biggest differences between an independent contractor and an employee is that a contract worker owns their own intellectual property. If you hire them, then they will give you ownership of whatever work they do on your behalf. Intellectual property refers to any ideas, inventions, patents, processes, formulas, and trademarks.

If they work on a project for you, they might sign an agreement to transfer ownership of the project’s intellectual property to your business. You may want them to do this if you don’t want any competition from their side projects. This is especially important if the contractor works with confidential information that belongs to your company.

While contractors own their intellectual property, they usually have a non-disclosure agreement so that they can’t share any trade secrets from your company. Some contracts might also prevent them from soliciting work away from you while completing a project for your business.

When Is a Contractor an Employee?

It may be more difficult to determine if someone is an independent contractor or an employee. The IRS has provided a list of 20 factors that can show whether or not that person is truly a contractor:

1. Instructions and training
2. Integration into your company
3. Right to control how work is done
4. Payment schedule
5. Reporting requirements
6. Responsibilities for equipment and supplies, workspace, insurance coverage, workers’ compensation coverage
7. Licenses and permits
8. Payroll tax deductions (e.g., FICA, FUTA)
9. Who provides benefits such as insurance, vacation time, sick days
10. Payment structure (e.g., hourly versus salary versus commission versus piecework)
11. Probationary period for employees versus no probationary period required for contractors
12. Being required to work a minimum number of hours
13. No direct supervision of the individual by your business
14. Right to assign other projects or clients if they’re helping you for a limited time or on a project-by-project basis
15. Work location (e.g., working at their own office versus your company)
16. Right to terminate the relationship with or without cause
17. Right to hire assistants
18. Work hours (e.g., setting their own hours versus your business setting their hours)
19. Responsibility for parts and supplies
20. Business licensing, permits, and tax filings in the individual’s name vs. your business’ name

Key Takeaways 

If you’re struggling with the differences between contractors and employees, consider the list of 20 factors from the IRS. This can help distinguish if someone is an independent contractor or not. This article also provides some information about the most important differences between contractors and employees. Be sure to check out our resource hub for more articles like this one.

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