What is a contract employee

A contract employee—often referred to as a freelancer, contributor, or independent contractor—is a self-employed individual hired by a company to complete work on a project basis.

A contract employee is the owner of their own business. They can be a sole proprietor or own an LCC/LLP (limited liability company or partnership). As someone who runs their own entity, the tax obligations they have towards the state are different compared to an employee.

Contract employee vs. permanent employee

Every country defines ‘contract employee’ differently, but there are some key differences between permanent employees and independent contractors. Consider the following when determining a worker’s status.

Autonomy: If a worker is using their own equipment and dictating their hours, fees, and methods of working, they’re more likely to be a contracted employee.

Relationship permanency: Contracted employees are usually responsible for a specific project that isn’t part of the core business. If the employer-employee relationship is short-term, one-off, or occasional, the worker is not a regular employee.

Exclusivity: When you engage a contract employee, you’re considered their client, not their employer. Contract employees can have several clients simultaneously.

In the United States, if you have a worker that you classify as an independent contractor, and they don’t fit the criteria mentioned above, you may be found guilty of misclassification by the IRS (Internal Revenue Service). You’ll then have to pay back all the unpaid taxes, health insurance, worker’s compensation, and other statutory obligations.

If you still aren’t sure how to classify your employees, use these tests to determine worker classification.

Common contract worker positions

Generally speaking, any job can be done by a contract worker instead of a permanent employee. Some examples of contract employees include:

• Web designers and developers

• Social media managers

• Content and copywriters

• Digital marketing managers

• Business and legal consultants

• Accountants

• Online teachers

• Translators

Benefits of hiring a contract employee

Working with independent contractors might not be what you’re used to, especially if you’re a small business owner. However, there are many benefits to working with freelancers.

Cost-effective

As a business owner, you’re obligated to pay specific taxes for your employees and make deductions on their behalf (federal income tax withholding, social security tax, medicare tax). Permanent employees are also protected by the department of labor and are entitled to employee benefits such as minimum wage, mandatory breaks, vacation days, sick leaves, and pension plans.

Things are quite different with contract workers. The employer isn’t responsible for providing them with any of the above-mentioned employment benefits under the FICA or Fair Labor Standards Act. The employer is only required to pay a previously agreed-upon fee 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 the employer can pay much less than a full-time worker.

Less investment and fewer resources needed

Every full-time employee requires a lot of investment, from onboarding and training to equipment, supervision, and development. Freelancers are entirely autonomous, and they are responsible for all of these processes themselves.

This significantly impacts the business relationship since you can create a partnership instead of (micro)managing an employee. The only aspect of the business relationship the employer—or in this case, the client—controls is the result. Every other part of the process is the responsibility of the contracted employee.

Access to expertise

Independent contractors have a specific skillset that may 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 outsource the task and hire a contracted employee.

This significantly decreases your hiring time and lets you focus on other crucial positions you have to fill with common-law employees.

Disadvantages of hiring a contract employee

Not having to pay payroll taxes and working with autonomous and skilled individuals sounds promising, but there are a few disadvantages when working with independent contractors.

Less contact and communication

You might have trouble establishing a solid communication channel with a contract employee since they aren't as present as the rest of your 9 to 5 employees. Since they control their schedules, they may not be immediately available for calls or meetings like a common-law employee.

It takes a while to get used to working with someone asynchronously who doesn’t know the ins and outs of your company. However, you can use that outside perspective to improve your current business.

Limited control over the process

Although you have a say in the work results, how the process plays out is up to the contracted employee. They use their own tools, training, and methodology, and you won’t be able to oversee or manage every step. The degree of control is very low, which takes some getting used to.

The partnership isn’t exclusive

If you’ve only ever hired common-law employees, you may be used to having their total attention and availability during set working hours. But freelancers are entitled to work with multiple clients simultaneously and aren’t obligated to prioritize your work over others. They may also accept work from similar businesses while working with you unless they’ve signed a non-compete agreement.

How do contract workers get paid?

How you pay your contract workers depends on whether you hire a local or an international worker, if they are contracted for a short-term project or ongoing services, and the available payment methods.

Contract employees are commonly paid:

• By the hour

• Per project

• A flat fee

Typically, you can send paychecks by mail or direct deposit, just like you would for your internal employees. Before you engage a contract worker, both parties should sign a written employment contract that outlines the payment method and schedule so you’re both protected in the event of a dispute.

Hire and pay contract employees with Deel

Building an international team can be time-consuming. Hire and pay in over 150 countries with Deel without worrying about international compliance or tax forms. Learn more about hiring contract employees with Deel or check out the Global Hiring Guide to see where you can hire today.