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Difference between a Contractor and Employee

You’re about to hire your first employee…Wait, or is she a contractor? What is the actual difference and is your freelance designer an employee or a contractor?

It’s often surprising how many businesses aren’t clear on the definitions of a contractor and an employee because, simply put, they are very different.

If you feel that you are not completely clear on that as well, don’t panic or feel bad, just read this article.


A contractor may work for multiple companies on per project basis. Their workspace and hours are up to them. A contractor uses their own tools, skills, knowledge and workspace to complete tasks. The employer cannot control the process but can request and agree upon certain results, deadlines and budget.

Contractor’s fee is usually decided upon before the project begins and is set. They issue invoices per work completed, the same way a supplier does for goods or a service company for services provided.

The contractor and the company sign a contract for each job and it’s highly negotiable. It’s good to know though that there are general contract guidelines for hiring contractors as well.

Generally, companies do not pay taxes on behalf of contractors. They manage their own tax files and you don’t have to worry about paying anything more than their fee.

Contractors usually handle their insurance and retirement plans on their own and are not eligible for company benefits. However, you might choose to give them access to company facilities and resources but that’s up to you, the contractor and the specific project.

Many companies choose to classify employees as contractors because it’s easier and cheaper. However, this is the wrong way to hire. Make sure you review your employee’s status to make sure they are properly compensated. If you fail to do that, you might be laying the foundation of big legal trouble for your business.

Employee laws are some of the strictest ones and you don’t want to fail complying, trust me.


An employee is in for the long haul (by default). An employee typically works for one employer only, unless they are a seasonal or part time employee. They are trained by the employer to do the specified work at a designated location.

An employee usually works under the supervision of others and is strictly instructed on how the job is done. They have no control over working hours and resources and work with whatever you give them.

Payment for employees is on a per hour basis or a monthly wage. And if they work more than you have agreed in their contract they’re eligible for overtime pay.

The employee contract might get quite complex but it gives benefits to the employee so that they stay loyal and grow the company’s assets, this is a fair trade off.

There are predetermined clauses in contracts but other than that you’re free to agree to whatever terms work for you and your employee. One of the predetermined clauses is the maximum hours per week an employee can work, another – minimum wage.

You pay taxes on behalf of your employees. There is a tax deduction from the monthly pay but you’re responsible for paying it to the respective authorities.

By law, employees are entitled to benefits such as health insurance, retirement plan, vacation days, unemployment benefits, etc. Hiring employees is not easy from a legal point of view – there is a lot to take care of but all is necessary to avoid legal problems and claims from employees classified wrongly as contractors.

Which is best for me?

There isn’t one single answer to this question (sorry to disappoint you), because each business is different and has specific needs.

The general rule of thumb is that if you are looking for a long term relationship, you’d better hire an employee. This doesn’t mean you’ll be looking for a full time one – you can hire part time or seasonal employees as well.

The good thing about employees is that you not only pay for their health insurance but for your business’s health insurance as well – an employee is more loyal and more involved in making your business thrive than a contractor can ever be.

But if you are looking to complete a one-off project as quickly as possible and don’t think you will need similar services soon, or if you want to test several different people for the job, a contractor might be a better choice for you. Contractors are cheaper but they don’t work for you, they work with you, never forget that.

If you are not sure what hiring an employee means for your small business, you can stop Google-ing it and ask a professional here so you get an answer once and for all (and avoid lawsuits from someone who knows the law better than you).