Hiring an Independent Contractor vs. an Employee: What’s the Difference?

As your business expands, so will your hiring needs. And as you look to increase your staff, you’ll discover a lot of flexibility—from full-time and part-time employees to independent contractors and freelancers.

The use of independent contractors has grown significantly over the past decade, even more so during the pandemic. In 2018, NPR reported that 1 in 5 jobs in America is held by an independent contractor. In the next 10 years, contract workers could make up half of all jobholders. 

But what does it mean to hire an independent contractor? Is doing so good for your business? Learn more about independent contractors—and how they differ from traditional employees—below.

What Classifies a Worker as an Independent Contractor?

There are significant differences between employees and independent contractors. To start, when you hire an employee, you need to provide them with benefits and pay taxes on their employment. A full-time employee might receive healthcare, retirement benefits, or profit-sharing contributions. Both full-time and part-time employees require companies to pay into Social Security and Medicare. 

For companies, a major benefit of hiring independent contractors is the cost savings from these required payroll expenses. A firm might agree to pay a higher hourly rate in order to save on benefits and taxes (and the time it takes to file them).

Companies can also tap into advanced skill sets without having to train an employee or spend time onboarding them into the organization. Independent contractors are often viewed as providing key staffing opportunities when you need work done fast. 

However, there are more differences between independent contractors and employees that go beyond employee benefits. Failing to correctly label a worker as an employee can result in fines from the IRS and bills for unpaid taxes. This is why it’s important to keep the designation in mind. 

Other differences between an independent contractor and an employee include behavioral control, financial control, and the working relationship. For behavioral control, companies can give more instruction and set more limits on employees. They also tend to provide more training and evaluation. Financial control refers to the expenses a company covers—like the equipment a worker uses. Finally, the relationship refers to how a worker interacts with the business, either through written contracts, services provided, or work permanency. 

Even if you set out to hire an independent contractor, you may end up hiring a part-time employee based on the work they do and how you treat them.    

Can You Tell an Independent Contractor When to Work?

Independent contractors, by nature, set their own schedules. This is part of the IRS guidelines on employees vs. contractors. If a company tells an employee when to work, where to purchase supplies, and/or what tools to use, they may be considered employees.

For example, a clothing boutique can’t bring on workers as independent contractors and then set shift schedules for them to follow. In this case, they aren’t independent contractors but part-time employees. 

Independent contractors often step into their roles because they want to set their own schedules and enjoy work flexibility. They would rather work on a project or assignment on their own time when it’s convenient. They will also juggle multiple projects at once or move from project to project throughout the year.

However, there are times when you can dictate when a contractor works. You can set up meetings with the contractor that they need to attend, and you can set clear deadlines for them to follow with their work. This allows you to keep some of the control when managing contractors without stepping over the line and making them employees. 

Can an Independent Contractor Quit Without Notice?

Any employee can quit without notice, not just an independent contractor. However, just because someone can walk off the job doesn’t mean that it’s a good professional move—or there won’t be legal ramifications. 

The first thing to consider when a contractor quits is their payment. Unlike an employee, a contractor will have an agreement for payment related to the scope of work. In some contracts, the worker receives payment for half of the work at the start of the project and the remaining half at the end.

If the contractor quits, they need to work out terms with the client for payment. While this sometimes happens peacefully, negotiations for who owes whom may end up in legal mediation. 

Some contracts also have clauses for what happens if the project is terminated before completion. Either you or the contractor may owe the other money depending on these terms.

If you don’t have a set contract with an independent worker, then the contractor will likely provide notice when they’ve finished working with you. They can quit if they’re unhappy with the work situation, or they may provide notice that the contract will end within a few weeks—similar to an employee. This is considered good etiquette to ensure the relationship ends on a positive note. 

Is It Better to Hire an Employee or an Independent Contractor?

There is no easy answer as to whether it’s better to hire a contractor or employee. The answer depends on your business model and your hiring goals. If you need someone to work specific hours and to understand the inner workings of your business, then you may want to bring on an employee, even if you can only afford someone part-time right now. 

However, if you need to outsource work in order to create more time for internal projects, then a contractor may be a better bet for you. 

There’s a common misconception that contractors don’t need to be managed. While bringing on a contractor might allow for a more hands-off experience, these workers will still need to receive some training and want feedback from you. Make sure you set aside time to support your contractors—this way, they can provide their best work for you. 

Set Up Payroll With Lendio’s Software

Whether you take on an independent contractor or an employee, the team at Lendio is here to help. We formed a partnership with Gusto and can help you to manage your payroll processes. You can pay invoices and set up monthly payments to employees or independent contractors as necessary. Learn more about our employee support options so you can hire quality workers and grow your business.