As a business owner or manager, you’ll likely hit the point where you need some extra help. When this occurs, you have two main options: Hire a contractor or hire an employee. Unfortunately, it can be challenging to decide which one is the best choice.
In this article, we’ll explain the differences between contractors and employees, the pros and cons of each one, and examples of when you should hire one or the other. We’ll also share why it’s essential to differentiate between the two.
Key Takeaways
-
Contractors or freelancers are self-employed professionals who take on clients and projects as they choose.
-
Contractors are paid by the project, while employees earn salaries, benefits, and paid time off.
-
Companies have little control over how an independent contractor completes a project, while they have much more control over how employees do their work.
-
Misclassifying contractors and employees can result in fines, back taxes, and legal disputes.
What Is the Difference Between a Contractor and an Employee?
An independent contractor – also called a freelancer – is a self-employed worker who works with clients on a contract basis, while an employee is employed by your company and works only for you.
Here are some key differences between the two types of workers:
Contractors:
-
Might be working with multiple clients at a time.
-
Pay for their own benefits and don’t have their taxes withheld.
-
Get to decide how and when they accomplish the task you’re paying them to do.
-
Need minimal training or onboarding – just enough to know what you’re looking for in the project they’re doing.
-
Are hired for their expertise.
-
Have highly flexible hours but don’t have paid time off.
-
Are typically paid by the project.
-
Don’t receive supplies and equipment from employers.
-
Receive a 1099 form at the end of the year specifying how much they were paid by a company.
-
Don’t have their business travel expenses paid for.
Employees:
-
Work for just your company.
-
Can receive company-paid benefits and have their taxes withheld from their paychecks.
-
Have to do their work how and when you specify.
-
Require thorough training and onboarding.
-
Are hired for their expertise and their personality fit.
-
Have paid time off and vacation days.
-
Are paid salaries or hourly rates.
-
Are provided with supplies and equipment by their employer.
-
Receive a W-2 form at the end of the year that states how much they were paid and how much in taxes was withheld from their paycheck by their employer.
-
Have their business travel expenses paid for.
Pros and Cons of Hiring a Contractor
There are upsides and downsides to hiring independent contractors and freelancers.
Pros:
-
You will likely save money. Since you aren’t paying an employee’s salary, benefits, and onboarding costs, hiring a contract worker will likely save you money.
-
It adds flexibility. If you don’t like a particular contractor you work with, you don’t have to hire them again. You can also just hire the contractor whenever you need them rather than figure out how to keep an employee busy and paid year-round.
-
You don’t have to do as much management. Since you’re just paying for a final product, you likely won’t have to pay much attention to the project while the contractor is working on it, which can lighten your workload significantly.
-
You get to take advantage of niche areas of expertise. Your business might not be able to hire a cybersecurity expert full-time, for instance, but you can reap the benefits of someone’s expertise in this area by hiring them as a contract worker.
-
It simplifies your bookkeeping and compliance. Since you can’t withhold taxes or provide benefits for contract workers, your payroll and overall bookkeeping will likely be much simpler.
Cons:
-
You have less control over the final product. Yes, you can typically give a freelancer your specifications for the project, and they’ll usually allow you to make adjustments before they finalize it, but you won’t have nearly as much input as you will with an employee.
-
You only get the product. There is something to be said about having employees who can contribute ideas and help create your organization’s culture, and you don’t necessarily get that with contract workers.
-
There is less buy-in. While most freelancers and independent contractors care about doing their work well, your company is still just a client to them, so it’s not as important that they carry your values into their work.
-
It can be time-consuming to find and manage contractors. Yes, finding a contractor typically takes less time and money than hiring an employee does, but it does still take a significant amount of effort. This is especially true if you hire a large number every year.
Examples of When You Might Want to Hire an Independent Contractor
There are certainly times when hiring a contractor makes the most sense, such as projects that aren’t ongoing or tasks that don’t warrant an entire employee’s time.
-
Individual projects. Some projects have distinct start and end points, which make them great fits for contractors. This is especially true if the project requires some form of expertise that your staff doesn’t have or a time commitment that they can’t give it.
Some examples of these projects are:
-
Initial design or redesign of your company website
-
Creating a series of video ads
-
Taking professional photos of your facilities or products
-
Legal issues and tasks
-
-
Ongoing, outsourceable tasks. Sometimes, especially when your business is growing, some tasks need to be done, but you don’t have the resources to do them yourself. These are also often tasks that you don’t necessarily care how or when they’re accomplished – you just need the final result.
These are great opportunities to hire independent contractors or freelancers. Here are some examples of these tasks:
-
Accounting
-
Setting up and maintaining IT systems
-
Content creation for your website or blog
-
Digital marketing/SEO strategies
-
Cybersecurity
-
Graphic design
-
Pros and Cons of Hiring an Employee
Hiring an employee rather than an independent contractor has its upsides and downsides.
Pros:
-
You get a multidimensional worker. Especially at small companies, employees have to fulfill a variety of responsibilities. This adds to their value and can be a huge strengthening element for your company.
-
They’re (hopefully) invested in the company, not just the task. When you hire an employee, you can choose someone who is passionate about what your organization does, not just the work they do.
-
You get to have more input into their work. When you have an employee do a task or project, you can keep tabs on its progress, give input along the way, and specify how and when you want it done. This gives you a better guarantee that you’ll like the end product.
-
You have someone who can manage projects long-term. Whether it’s a task that needs to be done regularly or a project that requires ongoing maintenance and updates, hiring an employee ensures that someone will be covering that aspect of your business for the long term.
Cons:
-
Onboarding is expensive. Recruiting, interviewing, hiring, and training an employee adds up quickly. These tasks require both time and money, and it often takes about six months to a year for an employee to begin contributing to your company truly.
-
Salaries and benefits are expensive. You have to pay your employee for more than just the projects they complete, which can turn into a bad investment if they don’t do a good job or you don’t have enough work for them to do.
-
You have to train your employees. This isn’t necessarily a bad thing in itself, but when compared to contractors who do their own training, it is expensive, and it means being patient before seeing a return on your investment.
Examples of When You Should Hire an Employee
Knowing when you should hire an employee versus an independent contractor is complicated, but there are some times when hiring an employee typically makes the most sense.
-
Ongoing tasks. If you have a task or project that is going to need to be done or maintained for the foreseeable future, you may want to have an employee handle it.
These include:
-
Marketing
-
Website content upkeep
-
IT troubleshooting and development
-
Software development
-
User experience design
-
-
Core business processes. If you own a print shop, you probably shouldn’t hire contractors to do the printing. It’s important to have more control over these processes and more cultural buy-in from the people doing them, so hiring employees is typically the way to go.
-
Tasks that were outsourceable but are becoming more important as your business grows. Accounting is a classic example of this. Many small businesses don’t need in-house accountants, so they hire contractors to handle it for them.
Then, as they grow, they create too much work for independent contractors and want more involvement with their accounting processes, making it too complicated to continue working with contractors. This is a good time to hire an employee to handle this responsibility. Here are some more examples that fall into this category:
-
Payroll and accounting
-
HR
-
Distribution
-
Customer service
-
IT
-
Marketing
-
Why It’s Important to Classify Contractors and Employees
The line between independent contractors and employees can get fuzzy, but it’s important to know which of your workers fall into each category because misclassifying workers can result in back taxes, fines, and other penalties. In some cases, companies can even face criminal charges and lawsuits for doing this.
The IRS has a guide to determining whether a worker is an employee or an independent contractor, so read this carefully before you hire a contractor, and make sure you follow all of the rules carefully.
Contractor Vs. Employee FAQ
-
What is the difference between a contractor and an employee?
The difference between a contractor and an employee is that a contractor is self-employed, and an employee works for you. Contractors and freelancers typically take on clients and projects as they wish, charging for the projects they complete for those clients.
Contractors don’t earn a salary or benefits, and they don’t have their taxes withheld from their paychecks. They also can work with multiple clients at once if they choose to.
Employees, on the other hand, work for your company alone, doing their work where, when, and how you, as their employer, specify. They earn salaries (or hourly wages, including overtime) and can receive benefits and vacation time.
-
Why do companies use contractors instead of employees?
Companies use contractors instead of employees because they’re a cheaper way to get a project done. If a company has a single project or task, they need to have completed, hiring a contractor can be a great way to do this more cost-effectively.
Rather than paying for an employee’s salary, benefits, and equipment, they just pay for the final product. Companies also don’t have to withhold taxes from contractors’ paychecks – instead, they provide them with 1099 forms at the end of the year.
Author
Caitlin Mazur
Caitlin Mazur is a freelance writer at Zippia where she has written 140+ articles that have reached over 1 mil viewers as of June 2023. Caitlin is passionate about helping Zippia’s readers land the jobs of their dreams by offering content that discusses job-seeking advice based on experience and extensive research.
