An independent contractor is an entity, either an individual (a freelancer) or a company, hired by an employer to complete specific projects and tasks defined in an independent contractor agreement. They are usually equipped with specialized skills or knowledge and enjoy the flexibility of potentially working for multiple companies. If you’re considering hiring external staff, then it’s important that you understand the difference between independent contractor and employee status. With that in mind, today we are sharing an independent contractor vs employee checklist to help you understand what the different types of worker classification are.

An employee’s work, or damage they might cause, however, needs to be covered by your contractors’ insurance. Of course, if something happens on your client’s property, your client may not differentiate between your employee and someone you’ve subcontracted for a specific task. Even if you’re not legally responsible, you will still be the client’s first address for complaints. On the other hand, hiring employees doesn’t necessarily simplify things – it means you will need to provide additional types of insurance, including health insurance and workers comp. Businesses must withhold and pay income taxes, social security contributions (plus any gov-mandated extras) for employees. But you generally don’t have to cover any of the above for payments made to independent contractors.

Pros of Hiring Employees

With Practical Law, you are only minutes away from finding up-to-date and useful answers, forms, practice notes, and checklists about all the company’s employment law questions. The most successful contractors have specialized skills that suit short-term projects. Clients hire them to complete a job, they agree to a fee and deadline, and the contractor completes the work based on the agreement. Once the project is done, the relationship ends, unless another opportunity to work together comes up. A major goal of the contract is to provide proof that the worker is 1099 and not a full-time employee.

Employers and employees share taxes paid on their wages or salaries, while independent contractors are responsible for all self-employment tax on the net profit they make each year. For contractors, this results in paying 15.3% of (12.4% for Social Security and 2.9% for Medicare) paid in pros and cons of independent contractor vs employee quarterly estimated tax payments and year-end personal income taxes. An independent contractor is the owner of their own business, no matter the size. If they cause injury or property damage while on the job, they are responsible, just as you would be responsible if you had caused it.

Hiring Contractors vs Employees: Pros, Cons, and Differences

On the other hand, an employment relationship is formed between a business and an individual. An employment contract is formed when an employment contract is signed or once a relationship is entered into in which the individual works under the employer’s control. In other words, an employment relationship can still be formed without a physical document of employment terms and signatures. In other words, a worker’s status is not determined by the type of contract signed, even if the contract specifies whether the worker is an employee or an independent contractor. Employees are compensated on an hourly or salaried basis and are paid on a fixed recurring pay period. Contractors are paid by the hour or project according to prearranged terms.