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The Difference Between Independent Contractors and Working on a Contract Basis

Debbie Fledderjohann March 19, 2014

July 23, 2010

It seems like nearly every other blog post we’ve written lately warns of the dangers of misclassifying W-2 Employees as 1099 Independent Contractors. Yet at the same time, our other blog articles are saying what a great thing contracting is for recruiters, candidates, and client companies. So what gives?

It is important to understand that there is a massive difference between 1099 Independent Contractors and W-2 employees working on a contract basis, who we often refer to simply as contractors. Independent Contractors are truly independent. No one is paying the employer share of taxes such as Social Security and Medicare. They are not protected by Workers Compensation or Unemployment Insurance. They do not have access to employer-sponsored benefits plans. In a nutshell, they are like an independent business providing a service to another business.

Salary-to-Hourly conversion tableAll too often, workers are slapped with the label “Independent Contractor” so that the company they are working for can avoid paying taxes and other employment costs. But in reality, those workers are performing the same work and are expected to abide by the same policies as full-time, regular employees. Obviously, this is costing the government lots of tax dollars, so that is why they are cracking down. The IRS has outlined three main criteria for determining correct worker classification that you will want to refer to whenever you or a client company are in doubt about whether a candidate should be a W-2 Employee or Independent Contractor.

Contractors, as we refer to them often on this blog, are different. They are W-2 employees working on a contract basis, meaning that they are usually hired to work on a specific project or for a specific amount of time. Client companies often hire on a contract basis because they have work that needs to be completed, but they don’t want to permanently add to their headcount.

The major difference between those workers and Independent Contractors is that the contractors are actually W-2 employees, but they are employed by a staffing agency or a back-office service provider such as Top Echelon Contracting instead of by the company they are performing work for. By using contractors in this sense, the client company can still avoid many of the costs, administrative details, and hassles that come with hiring permanent employees while not exposing themselves to the risk of misclassifying someone as an Independent Contractor.

A recent Fistful of Talent blog post does a good job of explaining the difference between Independent Contractors and those working on a contract basis by using some recent hiring examples. However, we disagree with implication in the post that the trend of businesses hiring contractors is bad for the workers. This may be true for Independent Contractors because they do not get Workers’ Compensation, Unemployment, healthcare, or other benefits. But for those employed as W-2 contractors, they should enjoy all of the benefits of a regular employee if they are employed by a reputable back-office service provider or staffing agency. For example, Top Echelon Contracting pays the employer share of taxes for all of our contractors, makes sure they are protected by Workers’ Comp and Unemployment Insurance, and offers a full menu of benefits, including healthcare insurance through Anthem Blue Cross and Blue Shield. Plus contracting offers contractors more flexibility, more work-life balance, the opportunity to travel, and more. In many cases, employees actually prefer contracting to direct-hire positions.

The good news for your clients who may have workers misclassified as Independent Contractors is that you can help them convert those workers to W-2 employees working on a contract basis. They can outsource the actual employment of those employees to a back-office service provider, such as Top Echelon Contracting, which will serve as the W-2 Employer, handling the payroll, taxes, benefits administration, and more.

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