The Key Differences When Hiring Employees vs. Contractors
By Leslie Harding
It is important to understand how to hire and source both employees and independent contractors so you can build the ideal workforce for your business. Many businesses hire both types of workers, simply due to the nature of the work their company needs completed. Although there are some similarities in hiring and sourcing both types of workers, there are some key differences as well. In this post we discuss the differences between contractors and employees and what to know when hiring and sourcing both.
Employee vs. independent contractor, defined
At the most basic level, an employee is an individual who receives a Form W-2 from your company. That’s why some people refer to them as “W-2 employees.” An independent contractor is an individual or company that receives a Form 1099-MISC from your company. You may hear them referred to as “1099 contractors.” Typically, businesses have more behavioral and financial control over their employees and have very limited control over independent contractors. The IRS has put forth a lot of helpful guidance on the matter, which is important to review if you have any confusion about classification. You should note that individual states also have their own standards/tests for determining whether someone is an employee or independent contractor.
The table below contains a few of the common, key differences between employees and contractors:
| Employee | Independent Contractor |
| Receives a Form W-2 from employer. | Receives a Form 1099-MISC if required under law. |
| The Employer is responsible for withholding taxes and sending them to state and federal taxation agencies. | The independent contractor is responsible for all tax issues. |
| Employer pays for Workers’ Compensation coverage and may pay for other benefits, including health insurance. | The independent contractor is responsible for obtaining insurance and other benefits. |
| The employer can schedule an employee to work whenever the employer wants – e.g., 15-hour days every weekend. | Independent contractors can choose when and where they accept jobs. |
| Employees often have a regularly expected income though, e.g., a salary or ‘full-time’ work. | Independent contractors have more control over when they’re willing to work and how many hours they’re willing to work but have limited if any expectation of a set amount of income. |
As mentioned earlier, worker classification can also be subject to interpretation at the state level. Currently New Jersey, Massachusetts, and California have different and generally more restrictive definitions of what it means to be an independent contractor. In some instances, workers in these states must meet what is known as the “ABC Test” to be classified as a contractor; so if you are receiving services from workers in one of those three states it would be beneficial to familiarize yourself with the applicable requirements.
When it comes to worker classification, businesses cannot decide if an individual is an employee or contractor based on their own desires or business needs. Typically, the nature of an individual’s work and your business relationship with them will help determine their classification.
Sourcing and hiring employees
Roles often filled by employees will require substantial onboarding or training, will have a regular schedule, and will continue indefinitely, until either employer or employee terminates the relationship. They will also be roles that include a manager providing oversight and dictating how the work should be performed.
As an example, let’s look at a coffee shop. The frontline roles at a coffee shop, like barista and retail clerk, usually fall under the “employee” classification. A barista may be scheduled to work full or part time, but they generally expect to continue working in the same role and completing whatever tasks are assigned by their manager. Their schedule is set by their manager, not by themselves, and they must show up on time to the coffee shop whenever they’re assigned to work. When they are performing their job, they must follow the expectations and instructions set out by their manager, which typically includes details on exactly how to make each drink and what ingredients to use.
To hire an employee, the first step is to post the open role on your company website and appropriate online job boards. You must create a clear description of the job duties and expected qualifications. Then you have to filter through all of the applications you receive and schedule interviews with qualified applicants. After that comes performing interviews and deciding who you want to hire. Then there is the onboarding paperwork that comes with hiring an employee, including a Form W-4, reading and acknowledging the employee handbook, and possibly enrolling in the company health insurance plan. On your end, there may also be work to add the new employee to any relevant insurance policies and complete health insurance enrollment. Next up is procuring any goods needed for the employee to do their job. This may include a laptop and new company accounts, a uniform, a nametag, a desk setup, specialized tools, and more. Finally, someone must train the new employee on anything they need to learn to complete their job successfully at your company. As you can see, there is a high time investment and cost to hiring a new employee, no matter what type of business you are engaged in.
Sourcing and engaging independent contractors
Typically, roles filled by independent contractors are temporary and self-directed, meaning the contractor determines how the work gets done. These roles are not indefinite, but rather roles where an individual provides a certain, pre-defined service for a period of time.
Going back to our coffee shop, there are a few roles that independent contractors may fill at this type of business. For example, the shop may be holding a big event for a new drink that is launching. The owner hires three independent contractors to work this event. The contractors work for three days only — one day to set up for the event, one day at the event, and one day to break down the event. They may perform a variety of tasks during the event, such as moving materials, setting up tables, managing the line of customers, and handing out drinks. None of the tasks require intensive training or supervision. They are paid a flat fee to work all three days of the event.
To hire or engage an independent contractor, businesses may go through some of the same steps as hiring an employee, with a few key differences. First, to source candidates you may still post the role online, but you may also proactively look at sites where contractors post to advertise their services. Once you have identified possible candidates, you may interview them, but the focus is not on their long-term fit with the company, but rather their expertise and work samples. When hiring an independent contractor, usually both the business and the contractor agree to a contract outlining the project, payment details, and the relationship between the two parties. They will also usually fill out a Form W-9, but no other onboarding documents or paperwork is typically needed. Then the contractor may begin work immediately to provide the deliverables by any agreed-upon deadline . Businesses usually won’t be training them or offering detailed guidance like you would for an employee.
As you can see, sourcing and hiring independent contractors looks a little different than the process for an employee. It’s important to know how to do both as your business grows and roles/lines can be blurred. That way you can efficiently and effectively hire the best workforce possible for your business.
Worker classification in the future
Looking forward, it is possible the COVID-19 pandemic and subsequent economic downturn will impact worker classification. Specifically, there may be less support for states to enact narrower definitions of what it means to be an independent contractor as workers and businesses alike look to fill more temporary roles. However, some may support the opposite viewpoint:that now more than ever it is time to enact narrower definitions that classify more workers as employees. It remains to be seen how this plays out as the economy slowly recovers.
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This article was originally posted in Wonolo.
