8 Differences Between A Full-Time Employee And An Independent Contractor
A good number of companies hire independent contractors to perform specialized tasks. In fact, a 2018 study by the U.S. Bureau of Labor Statistics showed that independent contractors comprised between 6.9% to 9.6% of the total population of workers in the United States. Hiring independent contractors, despite its advantages, can lead to misclassification of employees and contractors. It is important that misclassification does not occur because it can result in the company paying significant taxes, penalties, fines, and in some cases, facing criminal penalty . To address any confusion surrounding independent contractors and employees, we have outlined the main differences between the two parties below.
An employee is an individual who works for a single company and performs work that is closely connected to the core of the business. An independent contractor is a self-employed individual who performs work for companies on a contract basis. In other words, the independent contractor is in control of their own business which offers services to other business.
A company is supposed to withhold taxes from the employee’s payment, but this is not the case for an independent contractor. The contractor pays a self-employment tax, which, according to the IRS, is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves [and] is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners."
The company provides full-time employees benefits which include health insurance, workers' compensation insurance, retirement plans, unemployment insurance, among others. Moreover, full time employees enjoy protections in the areas of minimum wage, overtime pay, etc. By contrast, the company is not obligated to provide such benefits for independent contractors.
Full-time employees are paid a fixed specified amount on a regular basis, otherwise known as salary. Independent contractors, however, can charge different amounts across individual projects; additionally, contractors submit invoices for work done.
Unlike the case of full-time employees, employers have minimal control over the manner in which independent contractors perform their duties. Furthermore, contractors decide their work hours. Lastly, the independent contractor can accept work from other clients, while the employee cannot.
Employees usually undergo training, and the company provides them with avenues to further their growth such as workshops. Meanwhile, independent contractors are usually not given training; in fact, they are hired because they specialize in a particular task.
There are also differences between hiring an employee and an independent contractor. Firstly, hiring an independent contractor does not involve obligations such as training expenses, tax withholdings, and benefits. Moreover, when hiring and onboarding, normally more time is spent training a full-time employee than an independent contractor. This is because an employee needs to be acquainted with more information such as the company’s culture, history, and long-term objectives. However, a contractor’s main concern is information on their assignment. Lastly, hiring contractors, for the most part, involves less documents. For example, in the United States, the main documents required to hire an independent contractor are the W-9 form, the contract, and the contractor’s resume . Meanwhile, the process of hiring an employee requires the W-4 form, State Tax Withholding form, and I-9 Employment Eligibility Verification form, among others.
8. Loyalty And Level of Commitment
On one hand, full-time employees have a long-term commitment to the company and become part of the company’s community. Besides that, they are dedicated to the company culture and the attainment of long-term goals. On the other hand, contractor’s connection with the company lasts for the duration of their assigned project. Additionally, an article by business.com notes that independent contractors “are not invited to outside company functions such as motivational seminars, team-building exercises, celebratory events and developmental training”. Thus, it is harder for them to develop a sense of belonging and loyalty to the company. An advantage to this is that it is easier for a company to end the work relationship with an independent contractor, if the need arises.
Hopefully, this article makes the characteristics clear for both the employee and independent contractor.
*This article is not legal, business, or tax advice. The relevant individuals should still be consulted when making decisions regarding what is discussed in this post.
1. Businessnewsdaily.com. “Contract Workers vs. Employees: What Your Business Needs to Know, https://www.businessnewsdaily.com/770-contract-vs-employees-what-you-need-to-know.html.”
2. Thebalancesmb.com. “Hiring and Paying an Independent Contractor, https://www.thebalancesmb.com/hiring-and-paying-an-independent-contractor-398624.”
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