Contractual Employees vs. Permanent Employees: What’s the Difference?

In today’s changing workforce, the use of contract employees, also known as independent contractors, freelancers or work-for-hire staffers, is becoming more prevalent. Companies often hire these kinds of employees in place of part-time or full-time staff for a variety of reasons, including budgetary concerns and the need for specialized skills.

A contract worker, also known as an independent contractor or 1099 employee (based on the 1099 tax form they receive), is an individual who enters into a contractual agreement with a business in order to provide a service in exchange for a fee.

Advantages and disadvantages between Contractual Vs Permanent employment

What is a permanent employee?

They receive wages at an hourly rate or get paid a salary. They receive their payment in weekly, bi-weekly or monthly paychecks.

Permanent employees often receive benefits packages through their employers, though those benefits may differ based on their status as full- or part-time employees.

What is a contractual employee?

Contractual employees, also called “independent contractors,” “contract workers,” “freelancers” or “work-for-hire staffers,” are hired, or “contracted,” for a specific project or timeframe for a set fee. Often, contract employees are hired for their expertise in a particular area, like writing or illustration.

Contractual employees are usually hired for a short-term project for an agreed-upon pay. They may receive pay on a weekly, bi-weekly or monthly basis or when the project is completed.

Rather than hire a full-time, long-term employee with that expertise, a company chooses to hire a contractor for the duration of the project. These are not company employees but self-employed with their own business, whether its a limited liability company, sole proprietorship or limited liability partnership. They often work for more than one company at a time.

Differences between contractual and permanent employees

Contractual and permanent employees differ in many ways, including:

Benefits

Permanent employees are typically eligible for benefits, such as health insurance and paid time off. Since contractual employees aren’t company hires, they receive no benefits. They are considered self-employed and responsible for their own insurance.

Company resources

Permanent employees usually work in office settings. Contractual employees tend to work from home and provide their own equipment such as computers, printers and supplies.

Hours

Typically, permanent employees work a set number of hours with a set workday schedule. Contractual employees tend to have more flexibility. They may pick their hours and schedule as long as their productivity meets the company’s needs.

Taxes

Contract employees are classified differently than internal employees by the IRS for tax purposes. Contract employees receive 1099 tax forms rather than W2 tax forms. Typically, companies provide contractual employees with a Form 1099-MISC for non-employee compensation.

Time off

Permanent employees, especially those who work full time, receive paid time off for holidays and often sick, personal and vacation time. Contractual employees do not unless it is specified in their contract.

Types of employees and how to classify each

There are many types of employees a company might hire based on budget, projects and workflow needs. Here are the common classifications of employees:

Part-time employees work less than the full-time threshold. Most companies put part-time employees on payroll and withhold appropriate taxes. It is up to the company if they wish to extend benefits to their part-time employees.

Businesses often hire employees during busy times of the year. Employees accept these positions understanding that their jobs are not permanent. It is the responsibility of the hiring company to document, initiate payroll and provide safe working conditions. Seasonal employees are classified as full time or part time.

Employers may hire temporary employees in non-permanent positions for other reasons than the time of the year. Often, temporary employees do not qualify for benefits and can also be full or part time.

Contingent workers are contractual employees that meet a temporary specialized need. Businesses do not classify these professionals as employees. Common types of contingent workers include:

Leased employees regularly perform jobs for companies full time. Leasing companies classify them as employees, and therefore, handle payroll and other administrative tasks.

Contractual employee positions

Contractual employees are typically hired for technical or creative positions. The following are positions commonly filled by contractual employees:

FAQ

What does it mean when a job is contractual?

A contractual job is employment that requires you to sign and agree to terms of a contract before you begin working. Contractual work is usually for a specified amount of time and ends upon completion of a project or assignment.

What is the difference between a contract employee and a regular employee?

5 Awesome Benefits of Being a Contract Employee
  • Work on the Most Exciting Projects. At a traditional work-place, you don’t get to choose which projects you’d like to work on—they’re given to you. …
  • Add Some Flexibility to Your Schedule. …
  • Meet New People. …
  • Stay “Above It All” …
  • Become an Expert.

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