Independent Contractors vs. Employees

Independent contractors are paid to complete a defined task or provide a service for a limited time. Employees are hired for an indefinite amount of time, and the work they perform may change over time.

Employers have more control over employees than independent contractors

In general, employers have more control over employees than contractors. Employers can set the time and place an employee must show up for work. Employers train employees to do tasks in a certain way. Employers typically provide the tools and equipment an employee uses to do their job. Employers establish policies and procedures and expect employees to follow them.

Independent contractors agree to provide a service, but they may be able to set their own hours or place of work. Independent contractors usually provide their own tools and equipment. Independent contractors usually do not have to follow the procedures of the company that hires them. Of course, a company could always place a clause in a contract to ensure that an independent contractor follows certain procedures. But generally, contractors have more independence.

Employers have more responsibilities to employees than independent contractors

The test for whether a worker is an employee or contractor is different in every state. Most states look at similar characteristics to make the determination. This chart shows some of the common characteristics of employees and contractors.

Generally, the more control an employer has over their workers, the more likely they are to be classified as an employee. For example, if an employer sets strict working hours and gives specific instructions to a worker, that worker is probably an employee.

Whether someone is classified as an independent contractor or as an employee has major implications for both the employee, and the employer. Certain employment laws kick in if someone is classified as an employee. There are important tax implications as well.

Pros and Cons of Being an Independent Contractor

For the average person, it is probably better to be classified as an employee than an independent contractor. However, if you don’t mind a little extra administrative work, being an independent contractor be a rewarding path to financial independence. Here are some pros and cons of being classified as an independent contractor instead of an employee:

Pros of being an Independent Contractor

- Flexibility: Many independent contracts can choose their own hours or work from home.

- Independence: Independent contractors don’t have a boss. Their only job is to perform their work according to their contracts.

Cons of being an Independent Contractor

- Benefits: A major drawback of being an independent contractor is the lack of benefits. Independent contractors are not entitled to health insurance or even minimum wage.

- Costs: Independent contractors have to supply their own supplies and equipment. This means paying for their own car, computer, or whatever else is needed to get the job done.

Pros and Cons of Hiring Independent Contractors

Paying an independent contractor to perform work for you can provide major efficiency and administrative benefits. It cuts down on employment laws you have to monitor and follow. Here are the pros and cons of hiring an independent contractor instead of an employee:

Pros of Hiring Independent Contractors

- Employment laws: Businesses do not have to comply with as many laws if a worker is classified as an independent contractor. This includes providing health insurance and minimum wage, which can be expensive.

- Flexibility: It is often much easier to “hire” or “fire” independent contractors than full-time employees. Independent contractors typically require less training.

Cons of Hiring Independent Contractors

- Costs: Independent contractors often charge more for their services because they have extra costs, like paying self-employment tax and providing their own equipment.

- Control: Businesses that hire an independent contractor have less control over the quality of the contractor’s work than an employer has over its employees.

Employee vs. Independent Contractor Taxes

Tax implications are one of the most important differences between employees and independent contractors. FICA tax is a tax of 15.3% of a person’s income, which funds Social Security and Medicare. Employees and employers split this amount, each paying 7.65% of the employee’s income. Self-employed people, including independent contractors, must pay the entire 15.3% by themselves.

Courts and lawmakers have scrutinized app companies like Uber, Lyft, and DoorDash because they classify many workers as independent contractors. The relationship between these companies and the people who work for them is a mix between traditional employment and contracting.

For example, workers can set their own hours and work as much or as little as they want. On the other hand, companies use customer reviews to keep a close eye on which drivers are performing well and which are performing poorly. Workers provide their own vehicles and equipment, but the companies set strict standards for which vehicles and equipment are acceptable.

App companies would prefer to classify these workers as independent contractors. They claim that they could not afford to comply with employment laws for thousands of drivers and delivery people.