1. Control Over Work
• Employees: We, as the employer, have direct control over how, when, and where the work is performed. Employees usually follow set schedules, use company tools, and operate under company policies.
• Contractors: Contractors have greater independence. They typically decide how to complete the work, may set their own hours, and often use their own tools or resources.
2. Financial Relationship
• Employees: Paid through company payroll on a consistent schedule (hourly or salary). Payroll taxes are withheld, and employers are responsible for paying the employer’s share of Social Security, Medicare, and unemployment taxes.
• Contractors: Usually paid per project or invoice. No payroll taxes are withheld—contractors handle their own self-employment taxes.
3. Benefits and Perks
• Employees: Often eligible for benefits such as health insurance, retirement contributions, paid time off, and sick leave.
• Contractors: Not eligible for company-provided benefits. They are responsible for providing their own insurance, retirement planning, and time off.
4. Length of Relationship
• Employees: Usually hired for ongoing work. The relationship is open-ended and designed to continue indefinitely as long as both sides agree.
• Contractors: Generally hired for a specific project or a fixed period of time. Once the project is complete, the relationship ends unless a new agreement is made.
5. Tax Reporting
• Employees: At the end of the year, employees receive a W-2 that shows wages earned and taxes withheld.
• Contractors: Contractors receive a 1099-NEC if they earn more than $600 from a company. They are responsible for their own estimated tax payments throughout the year.
6. Risk and Liability
• Employees: The employer assumes more liability. For example, if an employee makes a mistake on the job, the company is often responsible.
• Contractors: Contractors carry more personal liability. Many carry business insurance to protect themselves and their clients.
7. Why It Matters for Business Owners
Classifying someone correctly isn’t just a formality—it has legal and financial consequences. Misclassification can lead to penalties, back taxes, and potential lawsuits.
Final Thoughts
As a rule of thumb:
• If you control what work is done and how it’s done, you likely have an employee.
• If you only control the results of the work, you likely have a contractor.
Employees and contractors both bring value to a business, but in different ways. Employees provide stability and long-term commitment, while contractors offer flexibility and specialized skills without the overhead.
Our team believes that when business owners understand these differences, they can make smarter, compliant decisions that protect their company and maximize growth.