Q: What is the difference between hiring an independent contractor and an employee?
A: Typically, businesses hire independent contractors to handle specific projects for a limited time. Employees take care of ongoing work, including different projects and roles. Independent contractors are considered to be in business for themselves. Employees receive a wage or salary, and may be entitled to benefits.
Businesses exercise different levels of control over contractors and employees. Independent contractors control their work and may have many different clients. A business may hire a contractor to achieve a desired outcome, but the contractor controls how, when and where the work occurs. Independent contractors generally provide their own equipment, work their own hours and can even hire subcontractors.
On the other hand, most employees are hired for an indefinite period and perform a variety of assigned tasks. An employee must follow the employer’s procedures and policies. The employer dictates the hours the employee will work, provides the employee’s tools and supplies, and sets rules for behavior. Employers can mandate details such as work attire.
Aside from expenses, the business only pays the contractor’s invoiced fees. Companies are not responsible for payroll taxes, Social Security contributions, unemployment or workers’ compensation or benefit costs for a contractor. Instead, the contractor pays these costs. Employees receive a W-2 (Wage and Tax Statement) showing their income and employer-paid taxes and other contributions.
If a business needs help on a specific project, an independent contractor is an excellent option. But do not hire or retain an independent contractor when you actually need an employee. Worker misclassification is not legal. If a business treats an independent contractor as an employee but does not follow employment and tax laws, it may be subject to back taxes, regulatory fines and potential lawsuits.
When hiring, review the scope of the work and determine whether a contractor or an employee is the right choice. Both have their place — just keep them distinct from one another.
Stacey Supina is on faculty in the ethics and business law department at the University of St. Thomas Opus College of Business.