Difference Between Employee Vs Independent Contractor

Whether you’re an employer or an individual looking for a new opportunity in 2017, we wanted to take the time and help you understand what it means if you’re an employee vs an independent contractor. From a tax perspective you need to understand the differences and from an insurance perspective (our speciality) you need to know what is and is not covered. So here is the breakdown:

Financial considerations

The differences between an employee and an independent contractor from financial point of view are as follows:An employee’s total paycheck amount is detailed in their Employment Contract, and hence is fixed as long as the contract remains unaltered. But, an independent contractor is paid by the invoices they submit to the employers upon providing the expected service. So, depending upon the discussed rate of billing as present in the Independent Contractor agreement and the number of hours billed, the independent contractor may well score a much higher sum than an employee over a certain period of time. 

  1. An employee enjoys the employment benefits such as coverage for insurance policies regarding healthcare, life and disability, if the employer meets certain criteria. Also, they would be provided with some retirement benefits as part of their Employment Contract. But the independent contractors would have to take care of these risks on their own time and money. Thus, a prudent independent conductor, who ascertains that these risks are well covered in time, would generally have less money to utilize in their daily life than an employee, if they earn the same amount of money over a certain period of time.
  2. The employees have to take care of a partial payment (the employee contribution amount) towards FICA, Medicare etc. The independent contractors will have to pay self-employment taxes, which over the years may become a significantly higher amount.
  3. Employees do not generally incur costs apart from daily commute, business apparels and other job specific costs, if any. Also, they may be able to claim reimbursements for the business expenses they may have to pay upfront, while on the job. On the other hand, an independent contractor incurs many different expenses just to start off and keep the business running, such as start-up cost, office expenses, stuffing cost (if applicable). There will be no reimbursements for these expenses to them. But, at the same time, an independent contractor is eligible to write off any business expenses from paying taxes and thus enjoy significant tax advantages over the employees.

Personal considerations

The emotional side of choosing the employment type is also quite remarkable. 

  1. An employee works for a single employer, often as part of a team. Hence dealing with all the stresses of conflicts and mismatched opinions within the team comes along as part of the daily job routine. The independent contractor may work for one or more employers simultaneously, often working on their own. Thus, working solo, while meeting the delivery expectations of one or more different employers is almost an obvious challenge for an independent contractor.
  2. The employees are secured with the blessings of team-work and a structured hierarchy of responsibilities, where success and failure often get distributed evenly among the chain. This is a boon while considering the bad impacts of a failed project and a curse when seeking individual recognition. But, the independent contractors have to shoulder the full responsibility for both failures and successes in their project delivery. There is no cushion to safeguard them from the harsh impacts, as well as no barrier to showcase their triumphs.
  3. Finally, an employee has the motivation of a guaranteed paycheck as long as the employment lasts, along with the added incentive of meeting the expectations of their teams and/or boss. But, an independent contractor has to work constantly in order to make their own brand stand out among the competitive market, in order to ensure a payment at the end of the day. Without the benefit of stability at work, it can be a bigger challenge to stay motivated at some times.

Administrative considerations

The job structure generally varies between an employee and an independent contractor, even if they perform the same job duty:

  1. For an employee, there are often requirements of minimum working hours, how to do and when to do restrictions in the job. An independent contractor may often choose to work as much or as little hours it takes to make a successful delivery, without much of a restrictions on the how and when.
  2. All intellectual properties, patents, and other work items generally become the employer’s/organization’s property, when created by an employee. But, this is not the case with an independent contractor, unless otherwise specified and agreed upon beforehand.
  3. An employee may enjoy other incentives (bonus, non-monitory perks) apart from their regular salary during their employment. Whereas for an independent contractor, there is no such defined benefits, and also no ceiling criteria for monetary gains.

If you are an employer about to hire someone:

Hiring an independent contractor over an employee or vice versa has its own pros and cons in terms of employer’s control over the work, payment schedule etc. But, when an employer considers whether to have an employee join his company’s payroll or go for a consultant, the thought process should focus more on the tax and legal implications of the job’s contract. Below are the implications:

Tax implications

The employer has to withhold the employees’ taxes, Medicare and social security, and has to maintain proper records of the same. Also, the employer has to pay social security tax, unemployment taxes for the state and federal government and the premiums for workers compensation or disability to a State Insurance Fund. None of these obligations apply for hiring an independent contractor.

Legal compliance implications

An employer cannot let go of an employee easily, unless the employment contract specifies so. If they are going to fire an employee, there are paperwork to be done, forms to be submitted and benefits to be wrapped up or distributed properly and due notice to be served. Also, an employee is protected by the federal and state laws for employments such as antidiscrimination laws, minimum wage requirements, overtime rules and workplace safety regulations. They can also form or join a employee union legally. But, none of these mandates are usually applicable for an independent contractor. 

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