Independent Contractor vs Employee: Key Differences
As a result, companies can test new markets quickly while investing the money they would use for entity establishment into other areas of their business. A domestic or global independent contractor, also often called a contract employee, is a self-employed individual who provides goods, labor, or services to a business or organization. An independent contractor is not an employee; a company hires contractors to perform temporary work or projects. Independent contractors allow companies to respond with flexibility to meet market demands.
MIT estimates the true cost of an employee is 1.25 – 1.4 times higher than their salary. So if you hire a full-time senior software developer for $125,000 per year, you can expect to pay between $156,250 and $175,000 total for that employee. What matters is that you have the right independent contractor vs employee pros and cons to control the details of how the services are performed. For a quick overview, you can reference the independent contractor vs. employee chart below. Both types of team members have advantages and disadvantages, so evaluating your business’ specific needs and goals is essential.
Risk & compliance management
Terms and conditions must be in line with local labor laws and be rightly justified. A business relationship, on the other hand, is between two business entities. Even though the contractor is a person, they usually provide their services under the legal guise of a business (as a sole proprietor). In other words, an independent contractor earns their money by being an entity doing business with your company. As previously mentioned, independent contractors generally enjoy a higher level of freedom in terms of working hours, work methods, and many other aspects of work.
Some self-employed specialists join unions and agree on relevant market rates with fellow workers, although, as the market dictates the price, there’s no legal minimum or maximum rate. While contractors can join the same unions as employees, they aren’t protected in the same ways should the union represent them in court. However, while the bargaining power of unions might be low for contractors, some countries will still pursue complaints aggressively. If a union is incapable of solving an issue for an independent contractor, the relevant tax and law authorities may step in.
Working as an Independent Contractor: Pros & Cons
Contractors are individuals (or sometimes companies) who work independently and are responsible for their own taxes, insurance, and benefits. Typically, contractors have specialized skills or expertise that businesses need for specific projects. If a worker is classified as an independent contractor, then the company typically does not withhold any taxes from the amounts paid to them. The company is not required to pay any taxes for the benefit of the worker.
She writes articles and other marketing materials for advertisements and social media campaigns. Elena Prokopets writes content for tech-led companies & software development businesses, marketing to them. If you have a looming gap in your workflow no one else can cover, getting a contractor on board makes sense. The above is particularly true for any type of task, requiring precise expertise — app development, copywriting, email marketing, UX design, localization, or translation. For example, you need someone to shoot you a promo reel for an upcoming marketing campaign. Manage your project’s expense, time, invoicing and payments — all in one comprehensive platform.
FOR INDEPENDENT PROFESSIONALS
Without the support of a human resources department, you’ll also have to familiarize yourself with employment law and your commitments to the IRS. As a taxpayer, you’ll have to self-declare your worker status to avoid misclassifying yourself. Working independently means abandoning some of the comforts that come with full-time employment. But if you can pull it off, you might feel happier working as a contractor versus an employee.
To learn more about hiring independent contractors, freelancers or consultants, read Working With Independent Contractors, by Stephen Fishman (Nolo). You do not have an unrestricted right to fire an IC, as you might with your employees. Your right to terminate an IC’s services is limited by the terms of your written IC agreement. If you fire an IC in violation of the agreement, you could be liable for breach of contract. After reading about the possible benefits of hiring ICs, you may be thinking that you’ll never hire an employee again.
Their rights are largely governed by a state’s contract law and any other provisions states may have regarding their employment status. Employers are generally required to cover Social Security payments for employees, but not for independent contractors. Contractors often need their own small business insurance to help cover mistakes and accidents. Even if you, the business owner, are insured, providers will not cover losses caused by your contractor because they are separate business owners. This is why some companies require contractors to have insurance before hiring them. In summary, knowing the right classification for your workers is essential.
You and an independent contractor negotiate terms of collaboration in a private agreement. Then sign a “work-for-hire” contract — a document detailing the deliverables, payment schedules, obligations, and indemnifications on both sides. Avoid the risks of engaging contractors and work with an EOR to seamlessly and compliantly hire full-time talent around the globe or convert existing contractors into employees. Still, keeping up with evolving employment laws around the world requires time and expertise that your HR team might not have. The following are some advantages and disadvantages of hiring independent contractors. When you lower costs and have faster access to talent, you move faster.
