Independent contractor vs. employee: pros & cons

Elena Prokopets
Written by Elena Prokopets
on January 27, 2022

Being a business of one can get you going. But becoming a company of many elevates you to a new playing field. You can pick up more challenging projects. Add new product or service lines. Or even remove yourself partially (or entirely) from the driver’s seat. 

Yet, hiring people comes at a cost (duh). Salaries are just part of the equation. Social contributions, tax withholding, bonuses, and benefits — cha-ching and 40% to 80% of your business income is gone. 

And that's how you ended up here, comparing the prospects of hiring an independent contractor versus an employee. 

What is the difference between an employee and a contractor?

“Employee” and “independent contractor” (aka a freelancer, gig worker, and side-hustler) are legal employment statuses, backed by respective labor laws and tax policies. 

  • An employee is a payrolled, full or part-time worker, who receives regular compensation (salary and benefits)  for their contribution to your business. The scope of their contributions is documented in a formal employment contract. Usually, a work contract includes details like core duties, standard working hours, overtime, wages, benefits, bonuses, vacation policy, and conditions for terminating employment. 
  • An independent contractor is a self-employed professional you hire on a per-need basis to carry out a specific task. Contractors are not directly employed by your company — the two of you enter a service contract on partnership terms. Unlike employees, independent contractors get to dictate their terms when it comes to compensation, working hours, project timelines, etc. You are in a position to agree, negotiate, or reject the proposed options. 

Money-wise, you can spend less with a contractor — since you don’t pay their social contributions, taxes, or benefits. But precisely for this reason, self-employed people charge higher hourly or project rates. 

Why is it important to distinguish between an employee and an independent contractor? 

There is a great deal of difference between an employee and an independent contractor in terms of compliance. 

In every country, business owners are responsible for two things — staying on the right side of local labor laws and paying all relevant employment taxes. The rules for the above differ for employees and independent contractors.  

Businesses must withhold and pay income taxes, social security contributions (plus any gov-mandated extras) for employees. But you generally don't have to cover any of the above for payments made to independent contractors. We foot our own tax bills. 

Similarly, labor laws protect employees more than self-employed folks. For example, you are legally not allowed to pay employees below the minimum wage. Or refuse to cover the employees’ social contributions. That will land you in legal trouble, 

You and an independent contractor negotiate terms of collaboration in a private agreement. Then sign a “work-for-hire” contract — a document detailing the deliverables, payment schedules, obligations, and indemnifications on both sides.   

All subcontractor payments will be classified as business expenses. Sure, these still will have to be reported for tax purposes. But there’s less hassle involved. Especially, if you use a platform like Xolo Teams.

How to onboard freelancers

Independent contractor vs employee: Main differences summarized

I get you, tax and payroll compliance sound complex. Especially, when you try to source talent globally. 

To make things easier for you, the table below further breaks down the differences between employees and contractors. 

Note: In this comparison, we are focusing on knowledge workers (rather than general labor contractors, who are awesome peeps too!) 

 

Employee

Contractor

Classification

Permanent member of your company kept on the payroll. 

On-demand, temporary extension of your workforce. 

Hiring practices

Part-time or full-time employment contract, in accordance with local labor and wages laws. 

Labor relationships are governed by a privately concluded work-for-hire agreement. 

Scope of work

Set number of weekly/monthly hours + overtime. 


Fixed role and scope of duties. 

Engaged on a per-need/per-project basis or kept on a retainer.  Scope of work can be measured in hours or deliverables. Out-of-scope items are billed separately. 

Compensation structure 

Salary (hourly, weekly, monthly). 

Benefits

Bonuses

Hourly, fixed-price, or retainer.

Payments are made in installments, based on a pre-agreed payment schedule. 

Taxation

The employer withholds and pays taxes + social contributions 

Handled by the contractor privately. 

 

To sum up, an employee is part of your business. They perform a range of duties under your business name (and on behalf of your company). For that, they receive all the awesome financial and non-financial perks. 

Independent contractors are partners to your business. They may be self-employed freelancers. Or operate as an incorporated legal entity. Unlike regular employees, contractors are more hands-on when it comes to execution since they have sharp expertise in a specific field. Plus, their business revenues and future gigs depend on their work performance. And referrals go a long way in the freelance industry. That’s why many contractors are focused on delivering the biggest impact in the shortest time. 

That being said, an independent contractor remains a “satellite” to your business, rather than its core. Unlike a regular employee, you shouldn’t expect your contractor to be as proactive with general operational duties (unless that’s part of their service!) or involved in all sorts of your business processes. 

Contractors are usually hired to provide a scoped service or solve a specific problem, rather than handle a line of duties an in-house employee in the same position would.  And in that sense, you have to adjust your expectations accordingly. In other words — don’t expect a contracted email marketer to know precisely what else goes on down the sales funnel. A contractor will know only as much as you tell them.   

Xolo_CTA_Filler_Bulb_L_4

Pros and cons of hiring employees

Employees provide you with a reliable fallback option. If you can’t handle a task yourself, you can delegate it to a hired pro, available in your Slack. 

“I hired my first real employee so that I could have two hands on deck at any time, even if it wasn't me”, shared Alessandra Pollina, founder of Quotable Media Co. “Getting even more people on board later on became important to me as I realized that I want to have a more sustainable business. One that won’t just collapse or disappear when I’m ready to step down and retire from having an active role.” 

Indeed, full-time employees can be a driving force behind scaling your business. And this leads to a bunch of benefits (but certain constraints, too!).   

Pros

  • Long-term commitment
  • Consistent availability 
  • Predictable work coverage 
  • Knowledge of your product/company 
  • Loyalty and support of your mission 
  • Ability to supervise and provide training 

 

Cons

  • Higher costs 
  • Longer recruiting timeline 
  • Risks of “misfitted” hire 
  • Onboarding, training, upskilling may be required 
  • High talent competition (best people don’t come cheap) 
  • Extra taxes and compliance complexities 

Xolo_CTA_Filler_Cloud_S_1

When to hire independent contractors instead of employees?

If you have a looming gap in your workflow no one else can cover, getting a contractor on board makes sense. The above is particularly true for any type of task, requiring precise expertise — app development, copywriting, email marketing, UX design, localization, or translation. Add double points if the demand for the task is temporary. For example, you need someone to shoot you a promo reel for an upcoming marketing campaign.

Another good reason to hire a contractor is when you need that specific task done… for yesterday. Even though the best independent workers have a waitlist, it would take less time than hiring, onboarding, and training a full-time employee to handle this one pressing chore. 

That being said, contractors aren’t just for part-time jobs. Many independent workers (myself included) stay with the same clients for 3+ years on a retainer basis. Such partnerships work for any type of job requiring regular, fixed inputs — from accounting and content creation to videography and HR services. If you can create a set fixed of tasks (or scoped deliverables) to pass on to a contractor, then you can retain them on an ongoing basis without hiring an equivalent person in-house. 

But arguably the biggest perk of hiring contractors over employees is knowledge sharing. Independent workers get to hone their skills over an array of projects. They also get to experience a lot of dysfunctional business processes, strategic goofs, and managerial mishaps within the organizations they worked with. So if you ever need a valid second opinion or an outsider’s perspective, you’d sure get a ton of insights. It’s like professional consultancy, but without heavy jargon. 

Who benefits the most from hiring independent contractors? 

Just about any type of business that understands how to collaborate and cultivate business relationships remotely. 

But overall, you’d mostly find independent contractors working with:

  • Entrepreneurs and solo business owners 
  • Early-stage startups
  • Rapidly-growing midmarket companies 
  • Agencies (across sectors) 
  • Enterprises looking for niche skillsets 
  • Publishers and online media companies 

…across geographies, sectors, and sub-niches. 

Making your first "hire" with Xolo

Ready to get your hiring engine rollin’? Assemble your dream team of global freelance talent using Xolo Teams

Nah, we are not just another freelance marketplace. We actually help you do the most boring and complex stuff — staying on the good side of compliance when it comes to international labor laws, no matter where you hire from and for how long. Automate contractor onboarding, expense tracking, compliance, and security for a very competitive flat rate. 

Freelancer Management System

About Elena

Elena Prokopets writes content for tech-led companies & software development businesses, marketing to them. Her empathy for the customer, expertise in SEO, and knack for storytelling help create content that ranks well and drives industry conversations.

Elena uses Xolo Leap so she can focus on her solo B2B content writing business without stressing over the compliance and admin overhead.