Accounting & Bookkeeping

Employee Vs. Independent Contractor: What Should You Choose

Employee Vs. Independent Contractor: What Should You Choose
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Small and medium businesses often come to a point where they need to choose between hiring an employee vs. hiring an independent contractor. A company may hire an employee or an independent contractor to do the same work and get optimum output. However, there are a few key differences between the two, and in this article, we will discuss the same and help you make a better decision about hiring the right individual. 

What is an Employee?

What is an Employee
What is an Employee

An employee is an individual that an employer hires to do a certain job regularly in return for a fixed remuneration in the form of a salary. An employee regularly works for their employer in exchange for a predetermined or fixed wage, sometimes known as a salary. There can be an employment contract that outlines the terms and conditions of the employment. 

The company or employer withholds social security, income tax, and medicare from the employee's pay. An employee can work for only one employer at a given time. And the organization has complete control over the employee's work, including what, how, and when it is to be completed.

Hiring an employee requires a step-by-step recruitment process. Employees can work part-time, full-time, or even get temporary recruitment for a stipulated period. The employer provides inputs such as tools, materials, equipment, and other resources necessary to execute the activity. The employee will perform specific tasks, obligations, responsibilities, and powers for monthly compensation based on their qualification, experience, abilities, performance, and position. 

What is an Independent Contractor?

What is an Independent Contractor
What is an Independent Contractor

An independent contractor is a self-employed individual who provides services to companies or organizations based on fixed compensation for a specific number of jobs. An independent contractor can be an accountant, consultant, lawyer, engineer, or anyone with specialized skill sets to perform the required task. An individual contractor offers services to their clients per the terms and conditions of the contract between the company and the contractor. They receive their payment on a freelance basis. 

An independent contractor is not subject to the client's control or influence. Thus they can use their discretion regarding the manner and method of accomplishing the task. Also, the independent contractor is liable for the project's outcome and timely delivery. Another important aspect of an independent contractor is that they can simultaneously offer their specialized services to multiple clients. 

Difference Between Employees and Independent Contractors

Difference Between Employees and Independent Contractors
Difference Between Employees and Independent Contractors

There are many differences between an employee and an independent contractor. We are mentioning some of the major differences here.

  • Payment, Taxation, and Other Benefits

The manner they are paid and taxed is one of the most significant distinctions between contractors and employees. When an employee joins a company's payroll, the business pays them an hourly wage or compensation and deducts the necessary taxes (e.g., federal income tax, Social Security tax, Medicare tax). Employee benefits are frequently also funded by the company. In addition to desirable advantages like flexible spending accounts, health reimbursement arrangements, health savings arrangements, paid time off, commuting perks, and stock options, they might also include benefits required by law, including health insurance.

In contrast, the same company would pay a contractor the agreed-upon amount for their work without deducting or paying any taxes. The contractor covers all of their own taxes, including self-employment tax and federal income tax. Additionally, individuals must independently pay for and receive any benefits they desire, including health insurance.

  • Onboarding and Training Process

Contractors and employees experience quite different onboarding and training procedures. Contractors frequently receive only the information necessary to complete a certain assignment because they are expected to concentrate on a single project. In contrast, full-time employees need extensive onboarding procedures to comprehend the subtleties of team dynamics, the corporate culture, and overarching objectives.

  • Flexibility

Each party's degree of flexibility in their work is another distinction between an employee and a contractor. Employees are bound by the policies and obligations established by the company for which they work. Contrarily, a contractor can work for one or more businesses; it's normal for contract employees to manage many clients at once.

  • Engagement goals

Businesses want to keep full-time employees engaged and motivated. Still, they also need to understand that contractors are never satisfied and are not expected to be as invested in the long term as full-time employees are. Many firms emphasize a contractor's specialized knowledge more than someone with employee status, who would be expected to show long-term devotion. Many businesses look for this expertise or skill set for particular tasks or projects, even if it means hiring these freelancers for a limited time.

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