At BWBacon, we connect great people with great companies every day. As part of that process, we ask both our candidates and our clients if they have a preference for either a contract/freelance or full-time engagement. Sometimes either might have flexibility for one or the other. There are advantages and disadvantages for each path.
In general terms, the difference between a contractor or freelancer and a full-time employee has to do with the type and classification of contract and the benefits, where there are strict distinctions – they’re either not eligible at all, or the employer is legally obligated to provide them. This post sets out to explain what a few of those differences are, in order to help both job seekers and employers determine which path to take.
A contract position typically has a defined project, scope of work, or timeline that both parties, employer and contractor, agree to.
An example might be a programmer who is brought on to help a company complete their web application. Upon completion of the work, and acceptance of that work by the company, the contract may extend to other related services or it will end and the contractor will need to find other work. The contractor is not an employee of the company, may support other clients at the same time, and often is an owner/operator of their own independent business.
There are also contract agreements that have no defined end date, which lets the employer simplify the process of bringing the contractor back on if/when another project comes up but without any obligation.
Contractors don’t have the same rights that official employees do and usually work without employer-provided benefits. This could be viewed as a savings since benefits provided by employers often require some level of employee contribution, yet now that all Americans are legally required to have health insurance, the cost of paying for a plan entirely out of pocket is often much higher than employee contributions towards employer-provided plans.
In addition to paying for their own benefits, contractors are responsible for managing and paying their own taxes, which are not handled by the employer. Specifically, contractors pay the full amount of a self-employment income tax and sometimes will pay at the end of the tax year in one lump sum, though they can also choose to make payments throughout the year. Employees pay an income tax out of every paycheck, and employers are responsible for a matching tax payment for every non-contract employee.
This means contractors have to be much more entrepreneurial and business-savvy than employees, at least with respect to managing their taxes and benefits, yet it also affords them a far greater degree of freedom. By law, contractors can’t be required to perform their work in a specific place or time, allowing them to choose when and how they get their work done. If these rules are broken by the employer, e.g. by requiring a contractor to work in the office from 9-5, the contractor could sue for employee benefits.
Since contractors are their own employers, they have the advantage of being able to deduct business expenses. Any costs incurred that can be viewed as work related, including gas, mileage, rent/mortgage (if the contractor works from a home office), computer, and cell phone can be written off at tax time. Employees, who usually have most of those things provided by the employer, don’t get the same tax breaks.
Contractors tend to earn more than a full-time employee in a similar role. This is because contractors are usually more specialized and are often called upon when the company is under pressure to complete a project on time, lending the contractor a bit more negotiating power than an employee might get.
Because contractors are essentially business owners, it takes an entrepreneurial spirit to be successful. They must feel confident networking and selling themselves to potential new clients. Contractors may go weeks without work so a reasonable amount of savings is practically a requirement.
Full-time employees have much more security. Though they go through periods of joblessness as well, it is usually much less frequent. With employer-assisted benefits and retirement packages, the full-time route also provides greater security for one’s health and future.
That being said, the freedom of choice that contractors have when it comes to whom they work for can be viewed as an additional benefit. If a contractor takes a job with a company that they discover they are incompatible with, ties can be severed relatively easily and without creating a major disturbance in the contractor’s life. The same may not be true for full-timers, who often feel more beholden to their current role even when things aren’t working out exactly as they prefer.
Many companies tend to see contractors as a fallback option, only hired if/when they are unable to find full-time employees with the necessary skills. Other companies rely on contractors because of some inconsistent nature of their industry that makes it unreasonable to have many full-time employees on staff year-round.
Therefore, the decision to hire contractors or full-time employees may be built into the type of company and the industry it serves.
One important thing to note is that some companies hire contractors because they appreciate the cost savings that come with not having to provide benefits. This is certainly one of the advantages of working with contractors but it’s critical for companies to understand and accept what they surrender when they choose contractors – with contractors, a company doesn’t have nearly as much oversight or control over how the work gets done. Companies that hire contractors for the cost savings but then attempt to treat their contractors like employees may be sued for the benefits they sought to avoid by hiring contractors in the first place.
If your company is considering hiring contractors, think about the nature of your work and how important it is that certain policies and procedures are followed. Though many contractors are professional and will do what they can to integrate with a company’s infrastructure, they are ultimately in charge of their own business. Reaching perfect alignment may not be possible. If that alignment is critical to how your company does business, you should consider hiring full-time staff whenever possible.
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