Contract vs. Full-Time Employee: All You Need to Know
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If you’re only entering the remote work market now or starting or expanding your business, you may be unsure whether contract workers or full-time employees would suit your needs best, and you’re not the only one feeling confused.
If you’re not sure what kind of benefits a full-time job brings along or what the difference between a freelancer and an independent contractor is, this article is for you.
It explains what contract employment and full-time positions mean and offers a detailed comparison to help you understand what type of business relationship is the right choice.
Who is a full-time employee?
Full-time employees (often referred to as W-2 employees) are hired directly by a company and are on its payroll. They usually work 40 hours a week and complete tasks for the company on a daily basis. As a result, full-time employees typically can’t work for multiple employers, especially not for direct competitors (some employers ask their employees to sign an NDA).
When an individual works for an employer full time, they typically have a fixed schedule and working hours. They also enjoy employee benefits such as paid vacation time or sick leave, retirement benefits, health insurance, life insurance, and more. In addition, as employees, they don’t have to deal with their income taxes - the employer covers them by deducting the designated amount of money from the employee’s gross pay.
A full-time position is sometimes used as a synonym for a permanent position since many consider a full-time role to provide greater job security, especially if the employee has an ongoing contract.
Note that full-time employees can be both salaried and paid by the number of hours they spend working for the employer.
The perks of full-time employment
Being a full-time employee has many benefits both for the employee and the employer.
Job seekers may like that an employee:
- Doesn’t need to worry about the taxes since it’s the employer’s obligation
- Has the right to take sick leave or another form of paid time off (holiday, parental leave)
- Doesn’t have to pay for healthcare or social security as the employer covers it
- Has a more predictable income and work schedule
- Is guaranteed full-time work all year round
- Gets the equipment and tools they need to perform the work
- May have access to professional development seminars, courses, and more covered by the employer
- Has better control of their employee’s work
- Owns the work created by the employee
- Can require that an employee signs an NDA
The downsides of having a full-time contract
There are also several downsides to working for a company full-time.
As an employee, an individual:
- Typically has a limited maximum pay
- May lack flexibility when it comes to working hours
- May not get a chance for promotion despite their skillset
- May find it hard to fit into the company culture
- Work-life balance may be more challenging to achieve
- There’s usually a lot of stress and pressure at the workplace
For the employer, a full-time employee means:
- Higher payroll costs, as they will include healthcare, social security, and other benefits
- It may be difficult to ensure the same workload for everyone at all times
- Providing the necessary training and equipment for the employee to perform the work
Who is a contract worker?
The type of employment where you’re not on the company’s payroll but rather work on a contract basis (such as short-term projects that clients assign to you from time to time) is called contract work.
You’re not the company permanent employee with a fixed working schedule and salary, so you can have your own flexible working hours and several contract jobs, even within the same industry. Independent contractors usually don’t sign NDAs.
However, many employers create contract-to-hire career paths for their contractors to gain their loyalty and ensure more committed work. Depending on your goals, this may be beneficial for you as well - if you’re looking to become a full-time worker after a specific period of time.
A contract role means you’re paid by the project, and you control the conditions under which you perform the work, while the employer only has the right to the outcome. You can set your own working hours, place where you perform the work, and determine a specific pay rate for it.
Independent contractors are sometimes called 1099 workers since that’s the tax form they need to fill in. If you have a contract position, your employer doesn’t have an obligation to pay for your taxes, medicare, or social security. That’s why many companies prefer hiring contractors to recruiting employees - they cost less.
Is there a difference between freelancers and independent contractors?
While independent contractors and freelancers both work on projects and for different organizations and not for a single employer, there are a few differences between these two types of employment.
Freelancers typically take on new projects more frequently, but they’re smaller in scope. Independent contractors may have long-term collaborations while still being paid by the project. Also, contractors may sometimes own a business and can delegate work to subcontractors, while that’s not a common case among freelancers.
However, as long as the IRS is concerned, freelancers and independent contractors are the same when it comes to taxes - they need the 1099 form and do their own taxes.
Is an independent contractor self-employed?
Yes, you can consider an independent contractor self-employed. However, that’s only one possible form of self-employment. You may also be a sole proprietor, and the main difference between independent contractors and sole proprietors is that independent contractors usually provide a service, while sole proprietors may have a physical product.
Who are part-time employees?
Working 40 hours a week is a norm if you want to have a full-time job, although the number may vary depending on the employer. If you work less than 30 hours a week, you’re considered a part-time employee.
According to the FLSA, being a part-time employee doesn’t change how the FLSA rules are applied, so you still have the right to overtime pay, minimum wages, and more. However, they’re not entitled to health insurance, paid time off, or retirement plans.
The perks of being a contract employee
For some people, doing contract work rather than being employed has several benefits. For instance:
- A contract worker has more freedom when it comes to time management and working hours
- Signing an NDA is not necessary
- A contract worker can decline a project if they don’t find it suitable
- There are more remote work options
- Their earning potential is much higher
- They may be offered a full-time position at some point
- Their professional life is more dynamic as they work on various projects
- Work-life balance is easier to strike
On the other side, the employer may experience these benefits:
- Reduced overall costs per employee
- No need to provide office space or equipment for the contractor
- It’s easier to supplement the business when there are additional projects
- You’re not required to ensure new tasks when a project finishes
The downsides of being a contract worker
Here are a few facts that contract workers may not like:
- Their schedule is unpredictable
- The income may fluctuate so they may need to be on a constant client hunt
- They have to take care of your own taxes and other documentation
- They have to pay for healthcare, social security, and other employee benefits
- Their time off is not paid - when they don’t work, they don’t earn money
- The lack of office may pose as an additional expense (renting an office or turning a room into an office)
- They need to provide their own tools and equipment to perform the work
The employer may consider the following as cons:
- Lack of control over how the work is being done
- They may not own the work created by the contractor
- They’re running the risk of employee misclassification
The IRS test for classifying employees
One important thing to bear in mind is the employee misclassification issue. We’ve covered the topic in detail in this article so you can read more about it and possibly run the test to determine if your employer may have misclassified you as a contractor.
The IRS 20-factor test helps both employers and employees determine what kind of contract an individual should have - a full-time or independent one.
Note that employee misclassification has legal and financial consequences for the employer. If you believe you’ve been wronged, don’t hesitate to take legal advice to clarify your situation. Uber is a good example of how misclassifying your employees as contractors can end with several lawsuits.
Choosing what suits your needs
There isn’t a universal answer to what is better - being a contract worker or an employee. It all depends on an individual’s preferences and what they value more.
Do you want more independence or paid employee benefits? Do you want to work in an office or have the freedom to choose where you’ll work from? Now that you have this detailed guide of how every business relationship works, you may find it less confusing to make the final decision.
Do you want to calculate how much hiring an employee abroad will actually cost you? Use our employment calculator to get an estimate about your overall costs for employees in different countries.