Basically, an employee is an individual who gets paid to work for your company. In nearly every country in the world, the differences between employees and contractors are pronounced. While the actual cost of payroll taxes will vary, it’s important to note that running payroll and remitting those taxes is a complicated process.

Whether they drove for Uber or offered accounting services, 16% of Americans have performed some kind of gig work in their lives. Very few of them did it full-time, but most — 82% — said they were happier working on their own than as an employee at a company. Department of Labor say there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the Fair Labor Standards Act (FLSA).

What key factors set employees and independent contractors apart?

Conversely, if you’re a US-based business and hire contractors abroad, you might have to submit a 1042-S form to the IRS on their behalf. While some companies require contractors to use company equipment (usually for security purposes), this can create a significant misclassification risk. The above descriptions are a good overview, but when it comes to differentiating between employees and independent contractors, each country has its own nuances and guidelines. If individuals work for themselves, they’re classified as independent contractors, whereas those who work in someone else’s business are considered employees.

Contractors, meanwhile, are responsible for handling income taxes themselves (although, in some instances, you may still need to submit certain declarations, which we’ll discuss later). Learn more about the consequences of misclassifying employees as contractors in our dedicated guide. Legal Templates LLC is not a lawyer, or a law firm and does not engage in the practice of law.

What is the difference between a local and an international employee?

For example, in some countries, ongoing contractor arrangements are automatically converted into employment arrangements after a set period of time (i.e., six months). If you’re unaware of laws like this, you can create serious compliance issues for yourself down the road. An independent contractor is an entity, either an individual (a freelancer) or a company, hired by an employer to complete specific projects and tasks defined in an independent contractor agreement. They are usually equipped with specialized skills or knowledge and enjoy the flexibility of potentially working for multiple companies. The company must also pay social security, Medicare, and federal and state (if required) unemployment tax for the benefit of the employee.

On the other end, enterprise managers can post opportunities for available talent, and then evaluate and engage the right person. One of the downsides to hiring a new employee is the amount of time it takes for them to learn independent contractor vs employee pros and cons their role. This greatly reduces onboarding time, which is helpful for managers and gets projects started faster. One of the biggest benefits of independent talent is the ability to re-engage them for future needs.

Reasons for Hiring

But — a skilled contractor will often expect more per hour than an employee with the same qualifications to make up for the lack of benefits and shared tax burden. At the state level, you could attract the attention of your state’s unemployment compensation or workers’ compensation agency if a worker you classified as an IC applies for benefits. If you’re scaling and growing a company, contractors are an excellent option, as they allow you to move quickly and flexibly. Learn more about offering benefits to contractors in our dedicated guide. Either way, it’s your responsibility to understand and align with any relevant tax regulations. If you fail to meet the requirements in any country, you may receive penalties and fines from the tax authorities.