What Is a Contract Employee?
The world of work is changing rapidly, and new technologies and working methodologies are being invented and implemented as we speak. It used to be a norm to work in a stable company, punching in and out and clocking 40h a week in your cubicle.
Nowadays, you can find all sorts of careers, businesses, employees, and types of workers. This gives companies options for hiring that weren't available before, such as hiring contract employees for certain services.
If your human resources department has never had experience with it, or you are simply having doubts about it, we've answered the most common questions about hiring external parties and outsourcing them a part of your business strategy.
What is a contract employee?
A contract employee, often referred to as a freelancer or an independent contractor, is a self-employed individual hired by a company on a project basis.
They are the owners of their own business, and they can be sole proprietors or own an LCC/LLP - limited liability company or a partnership. As someone who runs their own entity, the obligations they have towards the state, as well as the one employer has, are quite different. Although they work for other businesses, they are considered their clients, not their employers.
This is also why contract employees can have several clients at a time, performing various services for them.
Examples of contract workers
Generally speaking, any job can be done by a contract worker instead of a permanent employee. However, in the last decade or so, some positions and workers have switched to contract work with more frequency than others. There are several reasons for this, but it has been mainly done by ones who enjoy their autonomy and independence, provide services that aren't integral to the core business, and are also able to serve several clients simultaneously.
Another frequent criterion is the ability to do the work from home and perform all of the services required remotely. This, of course, isn't a norm but rather a frequent occurrence.
Some examples of contract employees include:
- Web designer and developers
- Social media managers
- Content and copywriters
- Digital marketing managers
- Business and legal consultants
- Online teachers
Benefits of hiring a contract employee
Working with independent contractors might not be what you are used to, and if you are a small business owner, you might have trouble realizing how this can help you. However, there are many benefits to working with freelancers.
Working with contract employees is cost-effective
As a business owner, you are obligated to pay several taxes for your employees and to make many deductions (federal income tax withholding, social security tax, medicare tax, etc.). Your employees are protected by the department of labor, and they enjoy employee benefits, such as minimum wage, mandatory breaks, vacation days, sick leaves, etc. A lot of them also have a pension plan, further prolonging that security. Things are quite different with contract workers since the employer isn't responsible for providing them with any of the above-mentioned benefits under the FICA or Fair Labor Standards Act. The employer is only required to pay a fee that is previously agreed on in the written contract, and there is no additional tax liability.
Every contractor is responsible for their own taxes, including but not limited to self-employment tax and federal income tax. Contract employees set their service fees, meaning that the employer can pay much less than a full-time worker.
Independent contractors require less investment and resources
One of the biggest differences between these two types of workers is the level of control or, better said, autonomy. Every full-time employee requires a lot of investment, from onboarding and training to equipment, and finally, supervision and development. Freelancers are completely autonomous, and they are responsible for all of these processes themselves.
This has a significant impact on the business relationship since instead of (micro)managing an employee, you can create a partnership. The only part that the employer, or in this case, the client, controls is the end result. Every other part of the process is the responsibility of a contract employee.
You can count on expertise when hiring contract workers
Independent contractors have a specific skill set that can be just what your business needs. You might have a specific staffing requirement, but only for a short-time project. Instead of hiring a part-time permanent employee, you can simply outsource the task and hire a contracted employee instead. This will significantly decrease your hiring troubles, and let your focus on other crucial position that you need to fill with common-law employees that enjoy all the employment benefits.
Disadvantages of hiring a contract employee
Although not having to pay payroll taxes and working with autonomous and skilled individuals sounds promising, there are a few disadvantages when working with independent contractors.
There is less contact and communication
When someone isn't as present as the rest of your 9 to 5 employees, you might have trouble establishing a solid communication channel. It takes a while to get used to working with someone who isn't always available and doesn't know the ins and outs of your company. However, precisely that outsider perspective gives them an edge that you can use to improve your current business.
Less control over the process
Although you have a say in the results of work, how the process looks is absolutely up to the contract employee. They use their tools, training, and methodology, and you won't be able to oversee or manage every step. The degree of control is very low, and that takes some getting used to. Again, this can also be something beneficial for you since you can redirect the time you would've to spend managing to something that will bring more value to you. If you aren't satisfied with the result, you can give them constructive feedback and wait for another version of the product or service you requested.
The partnership isn't exclusive
If you've only worked with regular employees, you can expect their commitment, loyalty, and dedication. You will probably be their only source of income, so the relationship will be pretty exclusive. Although your freelancers can exhibit the same behavior, they don't have to since they usually juggle multiple clients and their requests. If you aren't happy with the deadlines, requests, and work they've been doing, you can simply communicate your opinion to them.
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Contract employee vs. regular employee
Permanent employees and independent contractors have a lot of differences, but since there are no clear rules and regulations, it's easy to get confused. Also, since there are far fewer tax forms and tax obligations for freelancers and no benefits such as health insurance, employers are often found guilty of misclassification by the IRS. To avoid classifying common-law employees (also known as W-2 employees), these are the things you need to take into consideration.
The first criteria that you should take into consideration is autonomy. If a worker is using their own equipment, dictating their hours, fee, and method of working, they are more likely to be a contracted employee. Another important issue is the permanency of the relationship. If it's only a short-term partnership that you will only do once, or at least occasionally, they are certainly not a regular employee. Contracted employees are usually responsible for a specific project that isn't part of the core business, which can be done independently.
If you have a worker that you classify as an independent contractor and they don't fit the above-mentioned criteria, you will have to pay back all the taxes, healthcare, worker's compensation, and every other statutory obligation that you missed.
If you still aren't sure how you classify your employees, go through our detailed guide to learn more about the topic.
How do contract workers get paid?
When it comes to paying independent workers, there are many options you can choose from. It depends whether or not you hired a local or an international worker, if they are contracted for a short-term project or have you partnered up for something that will last longer (for example, monthly accounting services), and what methodology they are comfortable with.
It is crucial that you sign a written contract where you outline the payment method and schedule so that both you and them are protected. Payment can be done either by the hour worked or by the project, so make sure that you've agreed on all the specifics before they start. You can use a paper check or a direct deposit, just like you do with your internal employees.