In today’s workforce, understanding the distinction between working as an independent contractor vs employee is crucial for both businesses and workers. This differentiation not only impacts tax obligations and legal rights but also shapes the nature of the working relationship. As the economy continues to grow and traditional employment models evolve and change, understanding these classifications becomes increasingly important. This guide aims to explain the differences between independent contractors vs employees and provide clear insights into their roles, responsibilities, and benefits. Whether you’re an employer seeking to make informed hiring decisions or a self-employed individual aiming to understand your status and rights, this guide will help you navigate the landscape of employment classifications.
What is an Employee?
An employee is an individual who works under a contract, providing services to a company or organization in exchange for compensation, typically a salary or hourly wage. Working as an employee has some of the following characteristics:
Employees Work Under an Employer
The employer typically determines the tasks and responsibilities assigned to the employee, as well as how and where the work should be performed. Employees are generally expected to adhere to the company’s policies and procedures.
Employees Follow a Work Schedule
Employees typically work a predetermined schedule defined by the employer, which may include shifts or set hours each day. These schedules can be either full-time or part-time, with specific hours allocated for each.
Work Benefits and Perks
Employees may receive benefits as part of their employment package and contract, including health and dental insurance, retirement plans, paid vacation time, and various other perks.
Employers Manage Taxes
Better Job Security
What is an Independent Contractor?
An independent contractor is self-employed and has a business entity that provides services to another business or individual under a contract. Independent contractors are typically responsible for their own business operations. Some characteristics of an independent contractor include:
Independent Contractors are Their Own Boss
Independent contractors have control over how they complete their work. They set their own hours, choose their methods, and may work for multiple clients simultaneously. They are not subject to the same level of supervision or direction as employees.
Work is Usually Project-Based
They are often hired for specific projects or tasks with a defined plan and timeline. This can vary between clients or projects, and their day to day activities and work hours may be different everyday. The relationship with the client is usually temporary and ends when the project is completed and payment is given.
Payment Can be Sporadic
Independent contractors are usually paid on a per-project basis, a flat fee, or hourly rate. They create invoices for their clients for services rendered and do not receive employee benefits such as health insurance, paid time off, or retirement plans.
Independent Contractors Have Tax Obligations
Independent contractors are responsible for handling their own taxes. This may include income tax, self-employment taxes, and any other applicable taxes. They do not have taxes taken away from their payments which means they must file their taxes themselves every quarter.
Independent Contractors Manage Their Own Business Expenses
They are responsible for their own business expenses, such as tools, equipment, supplies, and travel. These expenses can often be deducted from their taxable income.
The Key Differences Between an Independent Contractor vs Employee
Employment Standard Legislation
Employees are protected by provincial employment standards legislation, which outlines specific requirements that employers must meet to respect and safeguard their employees. This includes provisions for benefits, severance pay, timely paychecks, and pension plans.
In contrast, independent contractors are self-employed individuals not covered by employment standards legislation. They make most decisions independently and work according to their own timelines. Their pay is determined based on the completion of projects and varies depending on the clients they work with.
Being Exclusive in Your Work
Job Titles
Employees have specific job titles that define their roles and responsibilities within a company, such as “Marketing Specialist,” “VP of Sales,” or “Project Manager.” These titles outline the duties they are contractually obligated to fulfill.
Purchasing Tools and Equipment
For employees, all tools and equipment needed for the job are generally provided by the employee. This may include a laptop, headphones, work mobile device, insurance, and any other repairs or maintenance needed throughout the job.
Independent contractors generally already own the equipment and tools they need to complete a job, or they purchase it on their own depending on the type of project they are working on. They are responsible for all purchasing, maintenance, and repairs associated with the equipment. Some contractors may rent equipment if it’s needed for a short period or they can charge their clients if they ask for a specific tool that the contractor does not have. This is up to the contractor and client.
Work Benefits
Employees are entitled to certain benefits and health plans, such as dental, insurance, travel insurance, and pension plans. These benefits are outlined in the employee’s contract upon hiring. All employers have different health plans and benefits that they offer their employees as a perk to working for them. This gives employees a sense of security.
Independent contractors are not under any group health plan or benefits. They must pay for their own insurance or health issues or sign up for single insurance plans under their respective provincial governments. They are responsible for the costs associated with health and pension.
Responsibility for Payment
Employees are on payroll and may get paid weekly, biweekly, or monthly. This is generally a base salary or hourly rate. Employees will know how much they are getting compensated for their work with every pay cheque. Paydays are timely, and employees are paid on a schedule.
Independent contractors and those who are self-employed are generally paid depending on the project or work they do and create their own invoices for clients after a job is complete.
Using Marketing Platforms as an Employee or Independent Contractor
Understanding the distinction between independent contractors and employees is crucial for making informed decisions in today’s changing job market. This clarity benefits businesses, helping them to comply with legal requirements and optimize their workforce, while empowering workers to understand their rights and responsibilities. Platforms such as HomeStars illustrate the importance of this differentiation in the home improvement industry. By connecting homeowners with skilled independent contractors, HomeStars ensures that homeowners can access a wide range of services with the flexibility and expertise that independent contractors offer. It provides contractors with opportunities to find work without the constraints of traditional employment. This mutually beneficial relationship is crucial for knowing the difference between independent contractors and employees, enabling both parties to thrive in their respective roles.
