What Is a Contract Employee vs. a Regular Employee?

By Indeed Editorial Team

Updated 16 October 2022 | Published 16 August 2021

Updated 16 October 2022

Published 16 August 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies often hire workers for different positions and varying lengths of time. Depending on an employee's position, they may be classified as an internal employee or a contract employee. Hiring contract employees on your team can include benefits and challenges, as can working for an employer as a contract employee. In this article, we discuss what a contract employee is, some differences between contract and regular employees and benefits and challenges when deciding to hire contract employees or pursue these roles.

What is a contract employee?

If you're hiring employees or looking for a job, you might wonder, "what is a contract employee?" Contract employees, also known as freelancers, independent contractors or contract workers, are individuals hired for a particular project or a certain timeframe, often for a pre-established fee. Employers frequently hire contract employees who are experts in specific skills such as design, writing or graphics. Companies usually hire them for projects that require them to apply their niche expertise short term.

Related: 5 Common Types of Employment and How They're Different

What is a contract between an employer and employee?

A contract between an employer and an employee is an agreement that usually outlines the expectations of the work to be performed and the compensation that the employee is to receive for their services. Contract documents for regular employees and contract employees usually include different language and specific details that pertain to the specific nature of their work.

A contract employee, for example, might enter into a contract with an employer that establishes a set fee for a particular product, such as a graphic or a document, while a regular employee might have a contract that describes general duties and a rate of pay for their time. The specific nature of a contract agreement is usually particular to each organisation and can even differ between employees. Be sure to research the legal requirements of contract agreements, or even consult with a legal professional to ensure all parties understand and are in compliance with relevant laws.

Related: What Is an Employment Contract?

Differences between contract employees and regular employees

Knowing the difference between a contract employee and a regular employee can help you decide which type of employee to hire on your team or which type of role to pursue. Even so, it can be useful to confer with an expert in employment law to make the right choice for your situation and location. To help you get started, here are some common differences between contract employees and regular employees:

Payment

Payment structures and types usually differ between contract employees and regular employees. Contract employees, for example, often invoice a company for which they've completed work upon concluding an agreed-upon project. Regular employees, however, more often receive regular payment in the form of hourly or salaried wages.

Related: What Are Employee Benefits and 17 Types of Employee Benefits

Taxes

Contract and regular employees usually pay taxes differently as well. Contract employees are usually responsible for making their own tax payments based on the payments they collect from the businesses they've contracted with. Employers may withhold taxes from their regular employees' payments and submit them on their behalf.

Related: The Main Differences Between Self-Employment vs. Employment

Equipment

The ownership and use of equipment and materials required to complete a job can also distinguish a contract employee from a regular employee. Contract employees, by definition, provide their own equipment to provide agreed-upon services. This can include items such as office supplies, communication equipment and technology such as laptops and computers. Regular employees often use the equipment owned and provided by the company they work for.

Benefits of hiring contract employees

There are several benefits for companies that wish to hire contract employees:

Less commitment

Contract employees can work for the length of a project rather than an indefinite amount of time. For employers, this means it's possible to hire employees for a specific situation with the understanding that their employment may conclude after an agreed-upon time. For employees, this can be a good way to learn about multiple career paths or work around shorter-term personal circumstances.

Related: Temporary Employees: Definition, Benefits, Terms and FAQs

Lower cost

Hiring a contract employee typically does not cost the company as much money as hiring an internal employee. While contract employees often earn more per hour, they do not receive extensive training, so the overhead for them is typically much lower than for internal employees. Contract employees also do not receive employer-funded benefits such as health insurance and paid holiday time. Some employees may enjoy the higher compensation, even without receiving other benefits.

Related: Permanent Employee vs. Contract Employees: Main Differences

Specific skill sets

Contracting allows companies to hire highly skilled workers in a specific field for a single project on which their expertise is vital. However, this does not require the company to keep the contracted employee long-term when there may not be consistent work for them. This can also be valuable for professionals who wish to perform only a specific task or type of task.

Minimal company resources needed

Many contract employees work from home rather than in the office. Remote contract workers do not use office resources like computers, printers and other supplies. For employees, this can be a benefit if and when they prefer or opt to use their own materials and supplies to complete their work.

Related: What Is Freelancing? With Advantages, Disadvantages and Tips

Challenges of hiring contract employees

There are some disadvantages to hiring contract employees:

  • Short-term: Contract employees may experience less commitment to a company than internal employees do as a result of the short-term nature of the contract employee's role. This might be challenging in situations where a contractor ends their employment early. For employees, this can be challenging if and when they find another contract after their current one ends.

  • Reduced availability: Contract employees may work for multiple companies at once. Because of this, they may not be available at the specific time when a company needs them. This might be challenging for contract employees as well when they are balancing multiple projects and deadlines.

  • Communication barriers: Some contract employees work off-site or remotely, or use different communication channels than a company's team of regular employees. It may be challenging to accomplish some objectives if communication differs between contract and regular employees. Contract employees might also notice these challenges if it's hard for them to get in contact with regular employees or leadership.

Related: Breaking into Full-Time Work with a Contract Background

Common contract employee positions

Contract positions are becoming more common, with many fields moving toward a contract employee-heavy workforce rather than full-time, permanent employees. Some industries lend themselves to contract work more readily than others, however. If you're looking for a contract role, knowing which fields commonly hire contract employees can help guide your search. Here's a list of some of the most common contract positions:

  • Web development and design

  • Graphic design

  • Search engine optimisation

  • Online teaching

  • Public relations

  • Virtual administrative assistant

  • Video game design and development

  • Social media management and marketing

  • Translation

  • Transcription

  • Research

  • Legal resources

  • Tutoring

  • Online sales

  • Photography

  • Customer service

  • Writing and copywriting

  • App development and design

  • Audio/video production

  • Data entry

Related: How To Get a Gig Job

What do you need to hire or work as a contract employee?

Hiring contract employees can be simpler for an employer than hiring internal employees because there may be less paperwork on the part of the company. As employees, it's important to know which papers and forms employers require when you begin a contract role. Generally, you may want to prepare the following documents when hiring or being hired as a contract employee:

  • Tax forms: Contract employees calculate and pay their own income taxes. Be sure to prepare any necessary tax forms to indicate contract or regular employment status for tax filing purposes.

  • Application or resume: A physical record of a contract employee's skills can help the company and employee keep track of which tasks a particular individual can complete. Employers can retain this document in case there is any question about the contract worker's qualifications later.

  • References: It is a good idea to obtain references for contract employees. This way, you can verify their skills quickly before assigning them to a project. For employees, providing references can be a good way to validate your qualifications when looking for contract jobs and making arrangements with employers.

  • Contract: A contract between a contract employee and employer clearly can help clarify a contract employee's role by delineating all expectations and work products. This can protect both the company and the contractor if there are any questions about the position.

  • Confidentiality agreement: Depending on the industry, a confidentiality agreement may be necessary, particularly if a contractor has agreements with competitors. Contract employees may also wish to negotiate the confidentiality of proprietary processes or ideas.

Related: Wage vs. Salary: Definitions, Differences and Examples

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