Remote hiring is rife with business opportunities—both for the business and the worker. For the former, they can expand their search and access top talent from other parts of the world. And for the latter, they can enjoy a more seamless work and life balance, free of commutes to the office.
15% of the U.S.’ highest-paying work opportunities are remote, which is why many companies are beginning to look into hiring remote candidates for their job openings.
However, hiring remotely is not as easy as it sounds, with all the different factors such as labor laws and income tax compliance, to worry about. Companies looking to jump into remote hiring must first be aware of the fundamentals, one of which is distinguishing between contractors versus permanent employees.
What Are the Key Differences Between an Individual Contractor and an Employee?
A remote worker can be onboarded into your company as an individual contractor or an employee, among other setups. While they both serve the same purpose of working for your company and fulfilling their given roles, how they do the job can have significant differences.
This is particularly true regarding your degree of control, additional workers' compensation and benefits, and employment tax withholdings. Classifying a remote worker correctly can help you fulfill all the compliance requirements and foster a healthy (and legal) working relationship with them.
Degree of control
The main difference between contractors and employees is how they do their jobs, particularly their work setup. Contractors are more independent than employees. They work on their own terms, save for matters you expressly discuss in your contract.
They usually operate with their tools and processes, which means you have less control over them and how they go about their responsibilities. This can benefit you, requiring less of your oversight if you only care about the completion of the project.
But if you want to have more control over your remote worker’s processes, then you might be better off hiring an employee than a contractor. Employees are not as autonomous and are under the absolute control and direction of their employers.
They follow your company’s processes concerning the work they do and how they do it. They collaborate with you and your team and usually report to supervisors and managers who provide instructions. Employees also follow your standard working hours, unlike independent contractors who typically work on their own time.
Worker's compensation and benefits
How you compensate your remote worker will also differ, depending on whether you hire them as contractors or employees. Like in-office workers you have hired in your locality, the latter must be paid according to labor and salary laws. They are entitled to the minimum wage laws and benefits like medical insurance, retirement plans, pension, 401k, and unemployment benefits.
The same cannot be said for independent contractors. Because they work on a contingency basis, you aren’t required to pay them a minimum hourly wage or provide benefits. The payment amount and method can be agreed on privately and reflected in the contract.
Tax withholdings
Independent contractors are considered self-employed individuals providing their services to client companies. Because of that, they are essentially responsible for their own employment taxes, with the employer not having to worry about withholding and processing tax payments.
On the contrary, an employee’s tax withholdings are requirements for the employer. They conduct tax compliance processes on behalf of the hired employee.
What Are the Pros and Cons of Being an Individual Contractor vs. an Employee?
Both types of remote workers provide valuable work to an organization. But the best setup will depend on your company’s preferences and priorities. It’s important to distinguish between them to ensure that you comply with all employment laws and requirements in your quest to engage an international worker.
Here are the individual contractor vs. employee pros and cons to help you make an informed decision.
Individual contractors
Freelancers, also called independent contractors, are workers who provide their professional services to companies without an employment contract. Instead, they work under an agreement that specifies the type of work they are engaged to do, their specific scope of duties, their compensation, etc.
Compared to employees, independent contractors are not really onboarded into an organization. They work on their own terms and use their processes, provided that they abide by the terms of their private agreement with your company.
Pros
Remote workers may choose to work as independent contractors because it gives them more freedom and flexibility. Not bound by company rules and employment regulations, they have complete control over their client portfolio, type of work, schedules, and workload.
They also have plenty of development opportunities to receive higher pay or earn more, primarily because they can engage multiple clients without worrying about conflicts of interest unless they sign a non-compete agreement with a company.
Independent contractors typically work on their own time, keeping in mind set deadlines for project milestones instead of having to work from 9 to 5. They can prioritize one client or project over another, depending on what works best for them and their schedules.
Cons
Independent contractors are responsible for managing their own income taxes and availing of any benefits, such as healthcare, unemployment insurance, disability insurance or social security. While that’s good news for companies because of the less paperwork, this may deter remote workers from agreeing to an independent contractor setup.
These workers are also equipped with their own tools, software, etc., that they may need to carry out responsibilities related to their expertise. Generally, they can only expect their clients to provide the equipment for them if agreed upon.
Because independent contractors don’t work a set schedule, they don’t enjoy any paid leaves or holiday bonuses. They operate strictly on a no-work, no-pay basis. This might also be a potential downside because it means their income won’t be consistent monthly.
But at the same time, they can always look for new clients—provided they take on the extra task of marketing themselves and their expertise.
Employees
Remote workers are hired similarly to in-office regular employees. They are engaged directly by the employer and work for that same company during work hours. They are typically not allowed to engage other clients as they work under an employment contract.
Because of their set working hours, employees are paid a fixed salary, which typically covers their services rendered for an entire month. They are also entitled to company benefits arranged for them by their employers.
When hiring employees, companies often look into their education and experience. After all, they can be onboarded and trained to develop the skill sets needed to excel in their jobs. This is in contrast to independent contractors that are hired for skills and expertise.
Pros
Most remote workers like being hired as employees because they are paid a fixed salary, which translates to a steady income. On top of that, they also receive employee benefits from their employers, such as paid leaves and vacations, healthcare, retirement plans, etc.
Regarding tasks, employees are usually given a set range of responsibilities. They may do the same things daily or otherwise take on new additional projects occasionally. Unlike independent contractors, they don’t need to look for clients every once in a while and market their services. Employment in a company means more job security, which remote workers still seek.
While the flexible work hours of independent contractors sound enticing, many workers still prefer fixed work hours. This schedule allows them to delineate between work and personal time, which helps foster work and life balance.
Cons
While some employees do like the usual 9 to 5, others don’t find it appealing because they are stuck at work for 8 hours a day with little flexibility and a lower level of control over their time. They usually have to put personal matters or errands on the back burner until they clock out.
Because they are hired as full-time employees, they also aren’t typically allowed to look for other sources of income. And even if they are allowed by their employers, it’s challenging to manage a side hustle with a fixed schedule.
Job growth and career development are typically slow in employment setups. This is primarily because they are assigned singular tasks that can be routinary. Their workdays are less challenging, which can dilute skills that make them dependent on the company in the long term. This is also why salary scaling is slower and more restricted in this work setup.
Employees are considered part of the company that hired them, unlike independent contractors who are more autonomous. Because of that, there is a greater likelihood of stress and burnout, especially if they fall under toxic management or leadership.
Which Is More Preferred by Remote Workers, in General, To Be an Individual Contractor or Employee?
Both individual contractors and employee work setups have their fair share of pros and cons. So overall, there is no one-size-fits-all answer as to which one is better or more preferred by remote workers.
While some workers prefer the flexibility and autonomy that comes with being a contractor, others may be more interested in the job security and benefits of being an employee. It depends on their preferences, career goals, job type, and industry.
Which Is More Preferred by US Companies To Hire: Individual Contractors or Employees?
In the same way, U.S. companies should also consider their own goals and project priorities when it comes to hiring either individual contractors or employees. They may have specific needs that one type of remote worker can address more than the other, which should be weighed heavily in their decision-making.
Work duration
In general, companies prefer to hire individual contractors for short-term projects. It’s the more cost-effective option, especially if the company cannot offer them benefits and a fixed salary.
On the other hand, companies with long-term projects or an ongoing need for a particular talent may choose to hire employees for consistent support and collaboration.
Skill augmentation
Companies that need to hire talent with specialized skills that are not available in-house may opt to employ individual contractors instead of employees. Because these professionals are hired for skill and expertise, they are more favorable for businesses looking for something specific.
Quality control and management
Independent contractors can be very distant in the sense that they work autonomously and aren’t onboarded to the company. Employers who want talent they can nurture and oversee on a broader scale may want to hire employees instead who can be led to have a stronger sense of loyalty and absolute commitment to the organization.
Specific needs
Ultimately, hiring an independent contractor or an employee depends on a company’s needs. So before making any decision, you should first identify your priorities and goals and choose which type of work setup will help you achieve them.
Conclusion
As a business owner or hiring manager, it's important to understand the distinction between a contractor and an employee to determine the most suitable work setup that aligns with your objectives.
Contractors offer staffing flexibility and reduced costs, while full-time employment provides long-term commitment and security. You need to evaluate your priorities and select the best option for your unique situation.
The market for remote workers is vast, and you’re likely to find individuals who prefer working as contractors and those who like being hired as permanent employees. Make sure you know how to distinguish between them and choose the work setup that meets your needs and company goals
And when you’re ready to start hiring, browse for remote LatAm talent in Near’s pool of exemplary candidates.
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