Employee vs Contractor
Purpose
The difference between employees and contractors primarily revolves around the nature of the work relationship, tax obligations, and legal responsibilities. The determination is based off several factors, and is typically not based on just one. Each determination should be based on the particular facts and circumstances of each case.
Comparison Table
| Distinction | Employee | Contractor |
| Relationship with the Employer | Works under the direction and control of the employer. The employer determines how, when, and where the work is done. | Operates independently and typically has more control over how they complete their work. They usually provide their services based on a contract and have the freedom to choose their methods. |
| Payment and Taxes | Paid a regular wage or salary, with taxes withheld by the employer (e.g., income tax, Social Security, Medicare). Employers often provide benefits such as health insurance, retirement plans, and paid time off. | Paid per project, task, or on a fee basis, and is responsible for paying their own taxes, including self-employment tax. Contractors do not typically receive benefits from the hiring entity. |
| Duration and Scope of Work | Often has a long-term, ongoing relationship with the employer, with work defined by job descriptions and company policies. | Usually engaged for a specific project or a limited time frame, with defined deliverables. Once the contract ends, their relationship with the employer is typically concluded. |
| Legal Protections | Covered by various labor laws, including minimum wage, overtime, and anti-discrimination laws. Employees may have rights to unemployment benefits and workers’ compensation. | Generally, not entitled to the same protections and benefits as employees. They must manage their own insurance and liability. |
| Independence | Generally, works within the structure of the company and often follows its rules and procedures. | Typically has more flexibility and autonomy, often working for multiple clients and setting their own schedules. |
| Type of Work | Generally, completes the same type of work as the company. For example, lawyers art a law firm | Work completed is typically not the same as the company. For example, a plumber working at a law firm. |
Summary
In essence, employees are integral to a company's operations and are governed by labor laws, while contractors operate independently, often with a specific scope of work, and have different tax and legal implications. The distinction is crucial for both tax reporting and legal compliance.