Many business owners seek assistance outside of their company for projects in the form of contract employees. These individuals are typically hired for a specified project or a certain time frame for a set fee.
Contract employees may be called independent contractors, 1099 employees, or freelancers, and are considered self-employed workers who operate on a contract basis for clients. The contractor completes work for the client’s company but is not on the company’s W-2 payroll.
Contract employee vs. internal employee
There are key distinctions between a contract employee and an internal employee. The primary differentiator is in the employer-employee relationship and tax liabilities. In an internal employee relationship, the employer is responsible for the tax withholdings, employee benefits, and things like maintaining liability insurance. A contract employee is responsible for their own taxes and benefits.
Employers hiring internal employees tend to offer in-depth training or onboarding for their employees. Employers also tend to offer their internal employees supplies or resources such as tech devices and company-sponsored software. Contract employees have training or instructions limited to their specific projects and use their personal equipment.
Employers typically have a set and enforceable schedule for their internal employees and pay the employees at regular set intervals. Contract employees work their own hours, often submit an invoice to an employer, and are paid upon project completion. Internal employees get W-2 tax forms for tax filing and contract employees receive 1099 tax forms.
[Read more: W-2 vs. 1099 Contractors: Tax Differences Explained]
Contract workers are hired for particular projects, resulting in a significantly shorter hiring, onboarding, and training process.
Benefits of contract workers
Many employers find contract workers highly beneficial for their business. Reviewing the benefits of hiring a contract worker will help with deciding if a contract worker is the best fit for your project.
- Tax savings: Employers of contract workers are not responsible for deducting taxes for the contractors (the contract worker is solely responsible for managing their own taxes) and do not have to cover payroll taxes like they would for W-2 employees. This is one of the largest time- and cost-savers for employers of contract workers.
- Benefits savings: Contract workers typically do not have benefits like health insurance, 401(k) plans, life insurance, travel costs, or paid time off coverage provided by the employer. Not needing to cover employee health care or paid time off benefits is a significant saving for companies.
- Equipment savings: Hiring contract workers who use their own equipment means the company does not need to front the cost of providing any equipment or office space to the worker. The contractor can work from their own home and use their own vehicle, their own phone, and their own tools or office equipment.
- Shortened hiring and onboarding: Contract workers are hired for particular projects, resulting in a significantly shorter hiring, onboarding, and training process. This saves both time and money for the employer, since onboarding can take one to two months and training can take six months to a year for a full-time employee.
- Reduced commitment and risk: The risk and commitment involved with hiring a contract worker is much lower since the workers are typically hired for a particular task for a set time frame — often a short period. Because the contract worker is only employed for the length of the project, there is no need to worry about long-term items like satisfaction for retention and turnover rates.
- Overtime savings: Contract workers get paid a set amount for the project, meaning they won’t accumulate overtime.
- Accessing skilled experts: Contract workers are typically hired because they're experts in their fields, so employers get access to a highly skilled worker to complete the project without having to internally train the worker to a certain skill level. For example, if you don’t have a marketing expert for a specific promotion you want to run, you can hire a contractor for the duration of the promotion.
- Time management: Employers do not have to manage details like shifts and time off for contract workers. Not having to define and manage what days and times contract workers are to be on the clock or when they are on vacation means freeing up your time to focus on bigger responsibilities.
[Read more: Working as an Independent Contractor? These Resources Will Help You Manage Your Taxes]
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