The primary distinction between contract employees and full-time workers revolves around differences in the employer-employee relationship and tax liabilities. Typically, a contracted worker has more independence over how they complete their work and is responsible for their own taxes, while a full-time employee works under the direction and supervision of an employer who reports their taxes. For a small business, working with contracted and full-time employees can have advantages for both the employer as well as employees.
While there is no exact definition of either contracted or full-time workers, the main differences between contract employees and full-time employees are the degree of the employer’s control over their work and the manner in which their taxes are reported to the IRS.
Here is a general overview of how to understand the major difference between contracted workers and full-time employees:
While contracted employees often tend to be cheaper for a business (since employers do not need to offer them fringe benefits such as health insurance or pay payroll taxes for them), there have been issues in the past where businesses have misclassified full-time employees as contracted employees, resulting in significant tax penalties and fees.
To help small business owners properly classify employees, the IRS has guidelines which provide assistance in defining different types of workers. Employers can also consult this checklist to help them differentiate full-time employees and independent contractors.
Understanding the distinctions between contracted and full-time employees is crucial for a small business seeking to expand or enhance its workforce. Continue reading to find out more specific requirements associated with both types of workers.
A contract worker, also known as an independent contractor or 1099 employee (based on the 1099 tax form they receive), is an individual who enters into a contractual agreement with a business in order to provide a service in exchange for a fee.
To be considered a contracted employee, a worker must generally meet the following requirements:
Contracted workers are not technically “employees” since they provide services on a short-term or individual project basis. Also, unlike full-time employees, contract workers do not have to be offered employment benefits by the businesses that hire them.
Full-time employees, also known as common-law employees or W-2 employees (based on the W-2 tax form they receive), are supervised by their employer, who directs and controls their work throughout a long-term relationship. The employer must pay payroll taxes for each of their full-time employees, as well as provide them with certain legally required benefits.
According to the IRS, there are three factors for businesses to consider when classifying workers as either full-time employees or contracted workers:
If most of these factors apply to the workers hired by a small business, then they would probably be considered full-time employees by the IRS.
For a small business, there are advantages to working with both contracted workers and full-time employees. Here are several factors to consider when comparing these two types of workers.
Ultimately, both contract workers and full-time employees can serve as good choices to fulfill the different projects and needs of a small business.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.