Independent Contractor vs Employee: The Differences Explained

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Have you been offered a job as an independent contractor but you’re not really sure what that entails? Or maybe you’re a business owner that needs to understand employee classification for tax reasons.

Understanding the difference between independent contractors vs. employees is important as an employer and a job seeker.

Check out our guide with everything you need to know.

Independent Contractor

What Is an Employee?

Basically explained, an employee works under someone that controls how and what work will be done. Employees get paid a monthly salary or hourly wages as defined in their contract and may be subject to overtime. Employees usually work for one business at the business premises and oftentimes receive benefits such as health care.

Employees are likely to be eligible for unemployment compensation or workers’ compensation in the cases of termination or injuries at work. Employees are also able to join or form a workers union.

Employers need to handle all taxes of their employees. This includes federal income taxes, state income taxes, and FICA taxes. This means that employees receive a net salary after employers withhold tax. Employers must provide their employees with a payslip each month and can do so using a check stub maker.

What Is an Independent Contractor?

Independent contractors are essentially workers outside of the business. Maybe they run their own business or do work for multiple clients. Usually, these types of workers get hired to do specific work and have a level of autonomy to do so.

They usually have the freedom to set their own hours but have to incur the costs of the job. Contractors are not eligible for workers’ compensation benefits or protected from discrimination in the workplace.

Independent contractors may not join or form a union as they are not permanent employees.

Unlike employees, a contractor’s taxes are not withheld by employers and they are paid in full. This means that independent contractors have the obligation of handling all of their income taxes. They will need to fill out tax returns to prove how much they have been paid each year – they will also need to set aside money to pay that tax.

Difference Between Employee and Independent Contractor

The differences between the two types of workers can be classified into a few subcategories. Behavioral, financial, and the nature of the relationship. Generally, employees are more protected and have more job security, while independent contractors have more freedom.

For employers, it is the difference between withholding taxes or paying in full and providing benefits and compensation.

Independent Contractor vs. Employee Understanding

As you can see, there are significant differences between being and employing, an independent contractor vs. an employee. The major difference is the handling of tax, which is a crucial factor as a job seeker and an employer.

Our business blog is chock-full of fascinating reads to help you navigate the business world – head over and check it out.

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