What’s the difference between an employee or a contractor?

As your startup grows, you will realize you need help or specialty services. You may consider hiring an employee or working with an independent contractor.

Before you make the decision, you should consider the following differences:

  • Taxes: When you pay an employee, you are required to withhold income tax, Social Security, and Medicare from the wages.  When you work with a contractor, the contractor operators as their own business and is responsible for their own taxes.

  • Benefits: Employees seek common benefits (i.e. health insurance, retirement plans), while independent contractors are responsible for their own benefits.

  • Control: The startup has a right to have greater control over an employee. The startup can control what the employee does, how the job gets done, how wages are paid, and whether expenses are reimbursed. Independent contractors define the deliverables, process, fees, and payment terms in the negotiated contract or agreement.

  • Accountability: The employee is accountable for their job duties, while an independent contractor is accountable for the agreed upon deliverables not how the work gets done. Contractor can subcontract or delegate work as they see fit.

  • Payments: Employees receive wages based on how the startup processes payroll, while an independent contractor invoices for services rendered.

  • Hours: Startups can specify the hours of work for employees, while contractors can work when and how they want.

  • Expertise: Employees have skills and relevant experiences to offer and may require training, while independent contractors bring specialized expertise to a project.

  • Supplies: Employees need supplies and resources to get the job done, while independent contractors provide their own tools and supplies.

The differences between an employee and independent contractor center around control and legal requirements.  To avoid legal risks and potential penalties, you want to make sure you know the differences and the requirements for hiring an employee versus working with an independent contractor.