Contractors vs. Full-Time Employees: What's the Difference?

Employers looking to bolster their team may hire independent contractors, typically for a single project or expert perspective. Yet while these individuals may serve vital roles for an organization’s success, there are some compliance differences between contractors and full-time employees that employers need to know.

What is an Independent Contractor? 

An independent contractor is a self-employed individual, business, or corporation that provides services to another individual or business under the terms laid out in a contract. 

They are not considered employees because they work only when required. As a result, contractors don’t require the same expenses that go into hiring, onboarding, and retaining a full-time teammate.

What's the Difference Between Contractors and Full-Time Employees?

The differences between an independent contractor and an employee are varied but vital, particularly legally. According to the IRS, “you are not an independent contractor if you perform services that can be controlled by an employer.” 

For example, a company might pay a contractor and an employee for the same or similar work—such as accounting—but if the employer has the “legal right to control the details of how the services are performed,” then an employer-employee relationship exists. 

The IRS determines an employer’s degree of control—and, subsequently, a worker’s independence—using three common-law categories: 

1. Behavioral: Can the business control how the worker does their job? 
2. Financial: Are parts of the worker’s job controlled by the payer? 
3. Type of Relationship: Does the worker receive benefits from the employer? Are there contracts specifying the relationship? Will the relationship continue after a project is completed?

Note: If an organization is still unsure about a worker’s employment status, it can file Form SS-8 with the IRS to make an official determination.

Do Employers Have to Pay Benefits to Independent Contractors?

No. According to the public policy institute Workplace Fairness, "[e]mployers that provide benefits to employees do not have to provide those benefits to contractors."

The same resource goes on to say that employers that are required to deduct payroll taxes from the pay of an employee, "[n]o payroll taxes are deducted from money paid to a contractor."

Why is it Important to Know the Differences?

For an employee’s wages, organizations are required to withhold taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax. Conversely, as the IRS puts it, employers “do not generally have to withhold or pay any taxes on payments to independent contractors.” 

Not knowing this distinction could create compliance concerns for organizations, including owing employment taxes for misclassified employees. Not to mention the headache caused for the worker(s) in question who will be required to file Form 8919 to determine uncollected taxes on their wages. 

Likewise, according to the Equal Employment Opportunity Commission (EEOC), employment and labor laws do not apply to independent contractors. Still, employers should adhere to regulations that prevent discrimination to avoid potentially harmful litigation—and boost recruitment and retention.