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Contractor Vs Employee – What's The Difference?

January 9, 2023

When you are a small business owner, it is important to know the difference between employee and contractor to ensure that your staff are set up correctly, particularly when looking at pay rates and working arrangements. The difference isn't always clear-cut.

The relationship between an employee and a business is essentially a contract of service. In contrast, an independent contractor is defined as being engaged under a contract for their services.

We’ve put together some handy information to help you identify the differences between a contractor and employee.

What Is An Employee?

An employee is a person that works in your business and is part of your business. This means that as a business owner, you and your business will mostly control how, where and when they do their work. Employees will also be part of your company’s payroll, which means they will receive wages and benefits in exchange for their hours worked.

What Is A Contractor?

A contractor on the other hand will usually run their own business or sell their services to others. They are often referred to as independent contractors, and would generally use their own processes, tools and methods to complete their work. They also usually negotiate their own working arrangements and may also work with more than one client at a time.

Things To Consider When Hiring Employees And/Or Contractors

When you hire an employee, they perform the work, often as you direct them to do so. When you hire a contractor they are usually providing a specialist service. While as the business owner you may direct them in what you expect, they exercise a higher level of control over their work. This information sets up the basis to differentiate employees from contractors and also sets up the context around the relationship an employer has between employees and contractors.

You can look at a broader picture to get a clear idea of the relationship between the business and contractors. This includes – tools and equipment, degree of control over when and how to complete the work, the hours of work, an expectation of ongoing work, leave entitlements, the right to subcontract, the right to work for other businesses, assumption of financial risk, and method of payment.

It is important to correctly define your relationship to ensure you are compliant with contracting regulations.

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Employee vs. Contractor Decision Tool

The table below provides some clarity on how to determine whether your business relationship with someone is an employee or contractor.

Employee	Contractor
The employee completes their role and receives a salary in return, along with leave, sick pay, deductions, payroll tax and superannuation.	Contractors negotiate their own fees and working arrangements. This may include a self-employed person who is enlisted to carry out a specific job or task for a pre-arranged time and agreed price. An employer will often cover a total fee, but the contractor will be responsible for managing their own superannuation requirements.
The worker is an employee.	The contractor runs their own business.
Has a permanent, open-ended employment contract to perform a specific task or set of duties.	Agreed arrangements and can work with more than one client at a time, usually within a predefined period.
They complete the work themselves and cannot subcontract or delegate it to someone else.	They can subcontract someone else to finish the job on their behalf.
You provide the tools and equipment required to finish the job. Or you reimburse the employee for the cost of equipment.	They provide the tools and equipment to complete the job and do not receive reimbursement.
The business owner carries the commercial and financial risk for work carried out.	The contractor carries the commercial and financial risk for the task.
The worker is part of your business; they do not operate independently from you.	The worker operates their own business, and they are independent of you.

When To Choose A Contractor vs. An Employee

Business owners benefit from using both employees and contractors. It all depends on your business situation, the type of person and the expertise you need to bring to the table. There are benefits for business owners to choose one or the other, depending on the job at hand.

Businesses need employees to complete daily tasks and help grow a business. They have set hours and bonuses, a set salary (hourly rates or otherwise), accrue leave, and entitlements. The employee works for the business.

Likewise, a business might need the expertise of a contractor to help grow the business. Projects with a clear end date often make independent contractors a more appropriate option.

Whether you work with contractors or employees, as a business you will need a reliable cloud payroll software to manage all of your hiring and payroll taxes needs. QuickBooks Payroll powered by Employment Hero is also Single Touch Payroll-enabled. It is simple to use and makes reporting a breeze.

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Contractor Vs Employee – What's The Difference?

What Is An Employee?

What Is A Contractor?

Things To Consider When Hiring Employees And/Or Contractors

Grow Your Business with QuickBooks

Employee vs. Contractor Decision Tool

When To Choose A Contractor vs. An Employee

Related Articles

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Help Me Choose

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Stay up-to-date with the latest small business insights and trends!