Here are some factors to look at when distinguishing between the two: Payment, taxation and benefits One of the biggest differences between contractors and employees is the way they are paid and taxed. Autonomy Another major difference between a contractor and an employee relates to their level of independence. Onboarding and training The onboarding and training processes also differ greatly between contractors and employees.
Hiring goals Schneiderman said the hiring goals for employees and contractors are also different. Flexibility Another difference between an employee and a contractor is the degree of flexibility they have in their work. How to distinguish an independent contractor from an employee The IRS looks at certain factors to see if a worker should be classified as an independent contractor or an employee of a company. Foley said these questions can help you determine how to classify a worker: When, where and how is the work done?
Is the work performed at the employer's place of business, or does the independent contractor work remotely? Does the employer set the hours, or can the independent contractor work whenever they want? Does the employer provide the tools, or does the independent contractor use their own equipment? Is the worker required to complete company training? Independent contractors usually do not have this requirement. Or are they doing temporary work on projects that have specific end points?
Is the worker paid hourly, weekly or monthly? Or do they get paid once an entire project is complete? Does the company pay for travel? For employees, travel costs are usually covered by the company. Independent contractors, however, pay their own travel costs and earn enough on the overall project that those costs end up being covered by the fee they're paid.
What happens if a worker is misclassified? Business News Daily Contributing Writer. Jennifer Post is a professional writer with published works focusing on small business topics including marketing, financing, and how-to guides.
She has also published articles on business formation, business software, public relations and human resources. Her work has also appeared in Fundera and The Motley Fool. Grow Your Business. Updated What Are Payroll Taxes? Learn your withholding tax responsibilities as an employer.
Quitting Your Day Job? The Basics on Benefits Ready to leave the corporate world behind? The agency is responsible for providing their employees with employment entitlements such as leave. Just because someone is hired for a few hours or a couple of days at a time, doesn't mean they're automatically a contractor.
Both employees and contractors can be hired for:. Having an ABN is not the deciding factor of whether or not a worker is a contractor. Many factors of the working arrangement are relevant. Just because a person submits an invoice, it doesn't necessarily mean they are a contractor. Other factors also need to be considered. Just because contracting arrangements are common in an industry, it doesn't necessarily mean that a particular person should be treated as a contractor.
This page is part of the Guide to starting a business. Learn the other steps to get your business up and running. We acknowledge the traditional owners of the country throughout Australia and their continuing connection to land, sea and community.
We pay our respect to them and their cultures and to the elders past and present. Toggle navigation. Employee or contractor. Employee or contractor? Last Updated: 26 March There are a range of factors that determine whether you're a contractor or not. This page will help you to understand the differences between employees and contractors. You may also pay tax and ACC levies that you should not have to. If you hire someone as a contractor when they are actually an employee, you may later be held liable for extra costs including eg: unpaid PAYE tax unpaid minimum wages holidays and leave entitlements.
Intention test. An employee must get paid holidays. Control vs independence test. Employee Contractor Example Control over work, time, location No Yes An employee usually has little or no control over the work to be done eg where, when, what, how ie the employer largely directs their work.
Set hours Yes No A contractor generally has more discretion regarding when and how much time is spent at work compared with an employee who will likely have set times and days to be at work. An employee generally has to request permission from their employer to take time off work. They are usually a specialist in their field of work, and so do not need to be closely supervised or instructed how to do their job. Integration test. A person is more likely to be considered to be an employee of the organisation if the work is: the type that is commonly done by employees continuous not a one-off project for the benefit of the business rather than for the benefit of the worker.
Employee Contractor Example Works with own equipment No Yes For an employee, the employer usually provides all tools and equipment to do the work eg work van. A contractor generally provides their own tools and specialist equipment. Team integration Yes No A contractor is less likely to be integrated into the team eg not invited to organisation events.
Paid by results No Yes An employee usually has a set fee for their work eg a salary or wage, whereas a contractor may be paid by results. Reimbursed for work-related expenses eg travel, petrol, equipment hire Yes No An employee is more likely to be reimbursed for work-related expenses, whereas for a contractor, these form part of the costs of running their business.
Employee Contractor Example Fees No Yes A contractor usually charges a fee for their services, whereas an employee is paid a salary or a wage. Minimum wage Yes No A contractor can be paid whatever rate is agreed to. A contractor generally pays their own tax directly to the IR. Profit No Yes A contractor is able to profit from their work. For example, they can often decide how much to charge for their services, and how many jobs to take on.
Have employees do the work No Yes An employee is required to perform their job personally and is not able to engage anyone to replace them at work.
Financial risk No Yes A contractor carries financial risk. For example, they may not profit from a job if their costs exceed budget. They may also give guarantees to cover breaches of their responsibilities.
They may carry their own insurance to help protect against these risks. Advertises for work No Yes An employee looks for work eg answers a job ad looking for a worker, compared with a contractor who often advertises their services.
Invoices No Yes A contractor usually issues invoices setting out their fees or charges in order to get paid.
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