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Independent Contractor vs Employee: Everything You Need to Know

Independent Contractor vs Employee

by admin

Dec 26, 2022

This entire write-up explains everything you should know about hiring the independent contractor vs employee checklist, related costs, requirements, business suitability, and more. Take the help of this article to get the smallest of information as sought. 

As a businessman or a higher-level manager, you may face problems deciding whether you should hire an independent contractor or an employee for your business requirements. This independent contractor vs employee checklist confuses even the smartest of entrepreneurs and causes chaos. However, this decision does not have to be so hard. If you have certain and proper information about what comes into play while deciding between an employee & an independent contractor, you can make the perfect decision quite snappily. 

In this article, we will explain to you the difference between hiring either of the two for your jobs. This will allow you to understand everything there is about hiring and its related attributes. So, let’s start with having a look at the difference between an employee and an independent contractor and then move on to other details. 

Difference Between Independent Contractor vs Employee Checklist

The table shown below will help you understand what is an independent contractor and an employee, what it means to hire an employee vs an independent contractor, and more. So, let’s have a look at the table right away for more information. 

Particulars  Independent Contractor Employee
Definition  As per the IRS US, any individual can easily be an independent contractor if he/she executes what is to be done instead of how it has to be done.  As per the IRS US, any individual can easily be an employee by delivering some kind of service to your business, managing the service for your business, or overseeing how to execute a service for your business. 
Costs Involved  Rates depend upon the tenure of the project or the hours invested for the same.  Salaries, taxes, incentives, payroll, other benefits, and more. 
Control  You have lesser control over the job and can only make amends when the results appear.  You have better control over the job and can make amends when the project is ongoing. 
Forms of Taxes Involved 

Form 1099-MISC

And, Form W-9

Form W-2

Form W-4

Right to Control An independent contractor does not have the right to control the operations.  An employee has the right to control the operations. 
What, When, and How The company decides the what, when, and how.  The company decides the what, when, and how but may also supervise the employee to handle the same. 
Company Dependency An independent controller is dependent upon the company until the payment is made and the task is complete. An employee is dependent upon the company until the payment is complete, the task is complete, and he is employee in the business. 
Tenure  The tenure of an independent contractor is limited till the date of execution of the task or the receipt of final payments.  The tenure of an employee is limited till the date of execution of the task, the receipt of final payments, or till the company decides to retain the same with the business. 
Length of Project Generally, an independent contractor is hire by a business to take care of small or limited-period projects.  Generally, an employee is hire by a business to take care of big or unlimited-period projects. 
Post-Job Payments  The company does not need to pay anything to the independent contractor after the job is complete and the payment is settle.  The company may need to pay anything to the employee after the job is complete and the payment is settle as severance pay. 

These were the main points of difference between an independent contractor and an employee checklist. Now, let’s try to understand why this distinction matters a lot financially and economically. 

Why does the Employee vs Independent Contractor Distinction Matter? 

When it comes to filing taxes, it becomes utterly important to distinguish between an independent contractor vs an employee checklist. The IRS manages and lays out certain rules and regulations related to tax payments and management. These results are different for both the employee and independent contractor. Hence, businesses must determine whether the hired help is an employee of the company or merely a temporary independent contractor. 

A business may gain more tax benefits in hiring an independent contractor than in hiring an employee or vice-versa. Hence, such businesses may try to exploit loopholes in the tax regimen. The business may show that the hired help was an independent contractor rather than an employee if it sees tax benefits in stating the same. The situation may very well be the opposite. The tax benefit is the only thing that matters to the businesses and the same can mend these the wrong way if given the chance. 

Hence, it’s important to establish the difference between an employee and an independent contractor. 

However, this question of whether a person is an employee or a contractor is a matter for lawyers and professionals to figure out if the need arises. 

How Much Does It Cost?: Independent Contractor vs Employee Checklist

Now that the basic purpose and requirements of hiring an employee or independent contractor are clear. Let’s understand the cost of hiring either one of these for any business to get a better insight. 


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One of the first questions that pop ups when talking about an employee or a contractor is, how much do these cost? It’s not easy to ascertain a fixed cost. You may think that hiring the latter is more expensive than the former one, but the reality may surprise you. Some also argue that hiring a part-time employee is the perfect alternative for the business, the mid-way solution. But that is also not a fact but a mere coincidence if this works out for one business. 

Due to the complexity of the matter, it’s also hard to figure out the cost of keeping all the numbers and facts besides the two heads. Then how do you ascertain which one of an employee vs an independent contractor costs more? 

To figure out the cost, you may start by analyzing the sources and kinds of costs levied. It’s very easy to figure out the cost of the contractor as the price is pre-determined and paid as scheduled. 

However, the cost of an employee varies as apart from the salary, various other costs are also to be taken into consideration. It has been ascertained by the experts that the actual cost of the employee is, at times, even higher than his actual salary. This is because the overheads like payroll taxes, bonuses, other experiences, and benefits are also added to this cost. 

Modes of Cost Calculation

Apart from the monthly or annual salary (for employees) and job payment (independent contractors), there is another mode of cost calculation as well which is much better and more reliable than any other method. You can calculate the per-hour cost of hiring either an independent contractor or an employee checklist. 

Per-Hour Cost of An Independent Contractor

Again, it’s very easy to find out the per-hour cost of an independent contractor. All you need to do is divide the total payment of the contractor by the total number of hours devoted by him to complete a project. The amount you will get is the per-hour cost of the independent contractor. 

Per-Hour Cost of An Employee

To calculate the per-hour cost of the employee, you need to ascertain the total cost that includes his salary, as well as other expenses, borne by a company. There are numerous cost calculators you can use to figure this out. Once the cost is figure out, all you need to do is divide the total annual cost of an employee by 2080 (average working hours per year). The amount that you will get is the total per-hour cost of hiring the employee in a business. Now the big question that appears is…

Is Hiring an Independent Contractor Cheaper Than Hiring an Employee? 

When comparing an independent contractor and employee checklist a general assumption is that the latter is more expensive than the former. However, this misconception is not a fact. It may seem like hiring the employee is more expensive, however, the reality is different. As the independent contractor takes care of his tax filing, the cost can get higher. The fees of the contractor can be miles higher than the annual salary of the employee. 

Additionally, the charges levied by a worthy and popular contractor are always higher. Hence, the cost of hiring may even increase. The tenure of the job affects this cost of hiring. If the project is short-term, then it’s better to hire an independent contractor than an employee. Alternatively, if there are multiple projects to complete or if the tenure of the project is bigger, it’s wise to hire an employee rather than an independent contractor. 

What Factors Add Up To Increase the Cost of an Employee? 

Generally, it is thought that the only expense associate with hiring an employee is the salary. However, other costs also come into play while ascertaining the cost. Firstly there is the Federal Insurance Contributions Act (FICA) associate taxes like the Social Security and Medicare taxes, unemployment taxes (SUTA and FUTA), and more. The second is the Payroll Taxes or the tax charged on the payroll of the employee. The third is the other costs of benefits like insurance(s), incentive(s), overtime(s), provident fund(s), vacation(s), time off(s), leave(s), etc. The fourth and last one is the miscellaneous costs like training costs, recruiting costs, development costs, etc. 

Independent Contractor or Employee Checklist: How Can the Type of Work Help You Decide? 

Sometimes, rather than focusing on the cost, even focusing on the type of work can help you decide between an employee and an independent contractor. Generally, businesses hire independent contractors when the task is one-time. This includes small tasks that require expert insight just once and then can be manage by the employee if require. 

Alternatively, if the business thinks that a task is long-term or repetitive, then it’s best to hand over the responsibility of the same to an employee. Additionally, you should hire an employee if the project requires constant management or improvement over an indefinite period. Moreover, if you have multiple projects within your grasp, then an employee can handle them better for the business. 

Independent Contractor or Employee Checklist: How Can the Control Over Work Help You Decide?

The last factor that comes into play while deciding between an independent contractor vs. employee checklist is the extent of control. Sometimes, some projects require utter control over the process as well as the end result. In such a case, it’s better to hire an employee than to hire an independent contractor. This is because the acts of a contractor can not be bounded or controlled as much as that of an employee. A contractor can’t be assign the working hours. And days as such hired help work according to their schedule. And the only thing they are bother about is the deadline. Not the how, the what, or the when, just about the submission of the project on the deadline. Hence, if you want control over the how, what, and when, you should hire an employee.

Independent Contractor or Employee Checklist: Which Suits Your Business? 

So, by now, it must be clear to you what is an independent contractor. What is the difference between an employee and an independent contractor. How to hire any of these, the costs associated with hiring, and various other related aspects as well. It’s safe to say, that the type of work and the total cost involved within, can easily help you ascertain who you should select between employee and independent contractor. 

If you have any other questions related to the topic, you can connect with the financial experts at The Ledger Labs. We will help you get the required details and solutions to your queries with ease. 

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