An employee works under your direction and on your schedule, and you withhold their taxes and usually provide benefits. An independent contractor runs their own business, decides how the work gets done and pays their own taxes and insurance.
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Independent Contractor vs Employee: Pros and Cons of Each
Choosing an independent contractor vs employee comes down to how much control you need over the work and how long you’ll need the help. The right answer depends on the kind of business you run, and many owners end up using both.
An employee works on your schedule, follows your methods and is paid a wage or salary, usually with benefits like health insurance and paid time off. You also withhold their taxes and pay the employer's share of Social Security and Medicare.
An independent contractor runs their own business. They're paid by the hour or by the project, they decide how and when the work gets done and they cover their own taxes and insurance.
If you decide how the work gets done, the IRS is more likely to see the worker as an employee. Getting that wrong can mean back taxes and penalties, so it's worth sorting out the work relationship before you hire.
If you're deciding between hiring contractors vs employees, contractors usually make sense for short projects and specialized skills you don't need every week. Employees give you people you can train and count on as the business grows.
Jump To: Example | Pros and Cons | IRS Rules | FAQ
Independent Contractor vs Employee at a Glance
Most of the differences between an employee and a contractor come down to who controls the work and who pays the taxes. The pros and cons and the IRS rules further down cover each row in more detail.
Independent Contractor vs Employee Example
Renee owns a landscape design firm with 12 employees, and last spring she had two jobs to fill. The firm needed a new website, and it needed a full-time office manager to handle scheduling, billing and client calls.
RENEE'S TWO DECISIONS
The website: A web designer quoted a flat $6,500 to rebuild the site over six weeks. Renee wouldn't need anyone for the website after launch, so she hired the designer as an independent contractor and signed an agreement that gave her firm ownership of the finished site.
The office manager: For a full-time role, Renee compared the yearly cost of each option.
| AS AN EMPLOYEE | |
| Wages: $22 an hour × 2,080 hours | $45,760 |
| Employer's share of Social Security and Medicare (7.65%) | $3,501 |
| Health insurance | $6,000 |
| Total | $55,261 |
| AS A CONTRACTOR | |
| $40 an hour × 2,080 hours | $83,200 |
She hired the office manager as an employee. That choice cost $27,939 less a year, and Renee could set the hours and train her new hire in how the firm does things.
State unemployment insurance and workers' comp added a little to the employee total, but the gap stayed wide.
“Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don't have the first, the other two will kill you.”
- Warren Buffett
Independent Contractor vs Employee
Pros
Independent Contractor
- You pay for the work you need, by the hour or by the project, with no benefits or payroll taxes on top.
- A contractor's hourly rate is usually higher, but the total cost is often lower for short or part-time work.
- If a contractor isn't a good fit, you can end the arrangement when the project is done.
- When your needs change, you can bring in someone with different skills without retraining your staff.
- Contractors pay for their own licenses, certifications and continuing education.
Employee
- You can set their schedule and train them in how your business does things.
- Employees build relationships with your customers and your team that carry over from one project to the next.
- They're available to cover gaps when the workload grows or someone leaves.
- You can hand ongoing responsibilities to employees you trust, which frees up your own time.
- With a trained team in place, it's easier for you to take a vacation or attend a conference.
Cons
Independent Contractor
- Contractors don't have to take your next project, and if your work isn't steady, you may be lower on their list.
- They're building their own business, so your company's success may not be their first concern.
- If you start controlling how or when they do the work, the IRS may treat them as employees.
- Unless your written agreement says otherwise, the contractor usually owns what they create, such as designs, writing or code.
Employee
- Payroll is usually a business's biggest expense, and you have to pay it on time every pay period.
- You withhold and pay payroll taxes and file reports with the IRS and your state, which takes time, so many owners hire a bookkeeper for it.
- To attract good people, you'll need to offer competitive benefits such as health insurance and paid time off.
- Training costs fall on you, and some roles need licenses or continuing education you'll pay for.
How the IRS Decides Who's an Employee
The IRS decides whether a worker is an employee or an independent contractor by looking at the whole working relationship and what happens day to day. It groups the evidence into three areas:
- Behavioral control: Do you decide how, when and where the work gets done, or train the worker in your methods?
- Financial control: Does the worker supply their own equipment, set their own rates, work for other clients and risk a profit or loss?
- Type of relationship: Is there a written contract, do you provide benefits and is the work ongoing and central to your business?
An employee fills out a Form W-4 when they start and gets a Form W-2 at the end of the year. A contractor fills out a Form W-9 and usually gets a Form 1099-NEC, which is why you'll hear the choice called 1099 vs W-2. If you're not sure which applies, you can file Form SS-8 and ask the IRS to decide.
The U.S. Department of Labor and many states have their own worker classification tests for wage and unemployment laws, and some are stricter than the IRS. Check with a CPA or employment attorney in your state before you bring on a contractor for work that looks like a regular job.
When a worker is classified wrong, the costs can include:
- Back payroll taxes for the Social Security, Medicare and income tax that should have been withheld and paid
- IRS penalties and interest on the unpaid amount
- Unpaid overtime or minimum wage owed to the worker under wage laws
- Unemployment insurance and workers' comp premiums your state says you should have paid
- Separate state penalties, which in some states are higher than the federal ones
Calling someone a contractor in a written agreement doesn’t make them one if the answers above point to employment.
This section offers general information only and was last reviewed in November 2026. Tax and labor rules change, so check the current IRS and state guidance, and for advice about your situation, talk with a CPA or employment attorney.
Using Both Contractors and Employees
You don't have to choose one or the other. Many businesses keep a core group of employees for the ongoing work and bring in independent contractors for projects and busy seasons, the way Renee did with her website.
A short-term need, such as a big project with a tight deadline, rarely justifies a permanent hire, and that's where contractors help most. If you're a first-time business owner, talk with a CPA before you hire either way, so you understand your tax and reporting responsibilities from the start.
Independent Contractor vs Employee FAQ
The questions below address what leaders most commonly ask about hiring independent contractors and employees.
Click on the (+) sign below to expand each question. Click the (-) sign to collapse it again.
What's the difference between an independent contractor and an employee?
Is it cheaper to hire an independent contractor?
It depends on how much work you need. Contractors usually charge higher hourly rates but cost you nothing in benefits or payroll taxes, so they're often cheaper for short projects. For a full-time, ongoing role, an employee usually costs less.
What are the advantages of hiring independent contractors?
You pay only for the work you need, you skip benefits and payroll taxes and you can bring in specialized skills for a single project. When the project ends, so does the arrangement.
How does the IRS decide whether a worker is a contractor or an employee?
The IRS looks at behavioral control, financial control and the type of relationship. The more you control how, when and where the work is done, the more likely the worker is an employee.
What happens if you classify a worker wrong?
You may owe back payroll taxes, penalties and interest, and state agencies can add their own penalties or require unpaid benefits. If you're unsure, ask a CPA or file Form SS-8 with the IRS before the work starts.
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Richard Gorham has led teams in financial services for more than 30 years, from retail branches and operations to investments and insurance, and he still leads a team today.
He founded Leadership-Tools.com in 2002 to give managers free, practical tools like the ones he used in his various leadership roles. Every tool here has been used in a real workplace and comes with a filled-in example you can follow.
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