The Difference Between an Employee and Independent Contractor

Let's face it: running your own business means knowing about things you may have never thought would be applicable to you.

Who knew you would need to have managerial skills, know how to write great sales copy, or be able to design a beautiful website? You may have also not considered that you would need to know how to fairly and appropriately compensate people who work on your team and what that means for how they are categorized under the law.

Essentially, there are two types of ways you can choose to bring people onto your team: as an employee or as an independent contractor. When considering which would work best for both yourself and the person you are interested in hiring, it's important to remember that it is not only about tax status. There are many other factors which also matter in this decision. 

Most notably, the degree of control to which the company has over the individual working with the company is a significant deciding factor. For example, is the individual required to work a certain number of hours and/or work during a specific window? Is s/he provided paid time off and other benefits? These are commonly marks of an employee relationship with the company. On the other hand, if the individual is only required to meet deadlines with no clear times s/he must be working and is responsible for their own benefits, s/he is likely considered an independent contractor. 

While it can be tempting to want to hire an employee rather than an independent contractor after considering that companies must withhold employees' income tax, Social Security, and Medicare from the wages whereas companies are not required to do the same with independent contractors, it is important to remember that it can be difficult to classify a team member as such, depending on the state in which you live and do business. 

Remembering the marks of each type of worker can be helpful in matching your needs and desires with the type of worker you may like to bring into your business. 

If you hire an employee, you: 

  • must withhold income tax, Social Security, and Medicare from wages; 
  • must provide paid time off and other benefits, such as sick and vacation time; 
  • must provide to the employee the equipment necessary to adequately perform the work s/he was hired to do; 
  • will have the right to control what work is done and when it is done. 

If you hire an Independent Contractor: 

  • you are not required to withhold income tax, Social Security, and Medicare from wages; 
  • you are not required to provide paid time off and other benefits, such as sick and vacation time; 
  • the worker should use their own equipment (computer, internet, phone, email, etc.) to perform the necessary work; 
  • you will have only the right to control the outcome or product of the work completed by the contractor. 

If you are still wondering which type of worker may work best for you and your business, you can learn more about both employees and independent contractors, as well as which may be more beneficial for your unique business here