Differences between Employee and Contractor

Online Applicant Tracking SystemIf you are reading this article, then you are at a point when your small business is expanding and you need additional help. Maybe you are hiring and just want to understand the differences between employees and contractors better.

While you are thinking of choosing an employee or contractor, you should also look at using an online applicant tracking system to manage your hiring. Recruiteze is the best simple and modern online applicant tracking system for small businesses.

In this article, we discuss the differences between employees and contractors.

Read this article to understand the advantages and disadvantages of hiring temporary workers

Also check out this article, which details how much it costs to hire a new employee?

What is the difference?

When you hire an employee, you will need to do the payroll, deduct the appropriate taxes, and pay the required taxes from the employee and company to IRS and State Agencies. Also, you will have to maintain and file a set of paperwork with the appropriate authorities.

A contractor can be hired directly or through a staffing agency. When you hire a contractor through a staffing agency, you will pay the staffing agency by the hour or the negotiated fixed rate. The staffing agency takes care of paying the contractor. The Staffing Agency can work with the Contractor as 1099, W2, or Corp to Corp.

When you hire a contractor directly, you can work with them as 1099 or Corp to Corp. In both cases, you will not withhold any taxes, and the contractor will be responsible for paying the appropriate taxes to the authorities.

Here are the Employment Type Definitions

Independent Contractor or 1099 Employee – A 1099 Employee is a temporary worker, who is responsible for paying the taxes himself. The employer is responsible for reporting the wages paid on form 1099 to the IRS. The employer should collect a W9 form from the 1099 employee to report the earnings to the IRS. Here are the IRS guidelines for 1099.

W2 – When you hire a W2 Employee, you are responsible for running the payroll, and deducting/paying Federal and State Taxes. Furthermore, you are responsible for payroll taxes such as Social Security and Medicare while also reporting to the IRS and State Agencies. The employees are required to fill out a W4 form which directs the employers on the number of state and federal deductions.

Corp to Corp – Means Corporation to Corporation. You hire either a company or an individual with a company and pay them for their services. The company is responsible for the taxes and reporting. In this model, you will have no liability issues. Most IT contracts will require the hired company to carry General Liability and Professional Liability Insurance.

Who is an Employee?

  • Works the number of hours and schedule set by you, the Employer.
  • Works under your direction to achieve your goals.
  • Most likely just works for you. This is no longer always true since a lot of people do part time freelance work if they get it.
  • Will work at your place of business. This is also not always true nowadays since the advancements in video and voice communications allow most desk jobs to be done remotely. Also, some companies prefer remote workers since you can save on office space.
  • Ideally, you will provide health insurance, life insurance and/or disability insurance.
  • Receives salary as a W2 Employee after deducting Federal and State taxes. Also, deduct Social Security and Medicare taxes.
  • Ideally, you will allow the Employee to participate in a retirement benefit like 401K.
  • Will be eligible to receive Worker’s Compensation for injuries in the workplace.
  • Will be eligible to receive unemployment insurance if the employee is laid off or fired.
  • The employment can be terminated only for a reasonable good cause and with appropriate notice.
  • Is covered by Federal and State Minimum Wage and Overtime pay rules. This is again dependent on whether the Employee is Exempt or Non-Exempt. Read this article on who is an Exempt employee.
  • The employee is protected by anti-discrimination laws.
  • May join or form a Union.

Who is a Contractor?
Online Applicant Tracking System

  • Can operate under a business name.
  • Can have employees under them.
  • Sends invoices at agreed intervals.
  • Depending on the arrangement, you can set the number of hours per week or if it is a fixed cost contract, the contractor decides how many hours to work to get the job completed.
  • Depending on the arrangement, the contractor may work under your guidance or can work independently to achieve the pre-determined outcome.
  • Usually works for more than one client.
  • Depending on the arrangement, they can work at your place of business or remotely.
  • You are not required to provide any insurance benefits to the contractors.
  • You are not required to withhold any taxes before paying.
  • You are not required to provide any retirement benefits.
  • Contractors are not eligible to receive Worker’s Compensation for injuries.
  • Contractors are not eligible to receive unemployment insurance.
  • Unless there is a time-bound contract, usually can be terminated at any time and for any reason.
  • Contractors are paid as per contract terms and are not covered by the overtime pay rules.
  • Contractors are not protected by anti-discrimination laws.
  • Is not eligible to join or form a union.

Why does it matter to you?

If a worker is misclassified as an Independent Contractor, it may result in expensive legal i