How to hire contract workers in the U.S.: roles, benefits, and considerations

What is a contract worker?

A contract worker is an individual engaged to complete a specific project (contract work) within a defined timeframe. Unlike regular employees, they are not on your regular payroll. Instead, they operate independently – often under written agreements – and are typically paid on a project basis or upon reaching agreed-upon project milestones.

You’ll often hear terms like independent contractor, freelancer, or gig worker; while there are slight nuances in usage, they all generally fall under the umbrella of contract labor. These self-employed individuals manage their own income taxes, benefits, and work schedules.

(In this article, we’ll use the terms contract worker and independent contractor interchangeably.)

Common roles for contract workers

Contract workers often bring highly in-demand specialized skills that help businesses fill gaps or complete temporary projects without the commitment of long-term employment. These roles are frequently outsourced due to their specialized nature or project-specific demand. Popular roles include:

• Graphic designers and illustrators
• Software developers
• Marketing consultants
• Legal and financial advisors
• IT specialists
• Writers and editors

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Understanding worker classifications: where contract workers fit in

Not all workers are the same, and selecting the right classification impacts everything from payroll to legal obligations. Beyond contract workers, businesses engage full-time employees, part-time employees, seasonal employees, temporary employees, leased staff, and interns. Let’s break down these categories to clarify where contract workers fit into the broader workforce landscape.

Full-time employees

These workers typically put in 35 hours or more each week. They’re on your regular payroll and usually receive benefits like health insurance, paid time off, and retirement plans. Businesses have a high level of control over their schedule, training, and duties. 

Best for: Long-term roles with consistent responsibilities.

Part-time employees

Part-time staff work fewer hours than full-timers, often under 35 hours per week. While they may receive fewer benefits, they’re still considered regular employees. Companies manage their taxes and withholdings just like they do for full-time staff. 

Best for: Steady support with a smaller time commitment.

Seasonal workers

Seasonal employees help during busy periods – like holidays or peak travel months. They know the job is temporary from the start, but they’re still employees under labor laws, meaning employers are responsible for workplace conditions and wage compliance. 

Best for: Retail, hospitality, and businesses with high seasonal demand.

Temporary employees

These workers fill short-term needs that aren’t tied to a specific season. They might cover someone’s leave or help during a product launch. When you hire temporary employees, they can be full- or part-time and often come through staffing agencies. 

Best for: Filling unexpected gaps or supporting limited-duration projects.

Contract workers and contingent workers

Contingent workers are a broad group of contractual professionals hired for specific tasks or short-term needs. This umbrella term includes independent contractors (contract employees), freelancers, and consultants. They typically work on a contract basis, set their own schedule, and are responsible for their own taxes and tools. 

Best for: Specialized tasks, expert input, or flexible project-based work.

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Not sure if you should hire contract employees or freelancers? Check out our article: Freelancer vs independent contractor: which one is right for your business?

Leased employees

These workers are employed by a staffing firm but work at your company. You get the help you need without handling payroll or HR tasks, and the staffing firm remains their official employer. 

Best for: Companies that need hands-on help but prefer to outsource administrative tasks.

Interns

Interns are often students or recent grads looking to build experience. Some internships are unpaid, but if the intern performs real work that benefits the company, you may be required to treat them as employees under federal labor rules. 

Best for: Training future employees or handling entry-level work while mentoring new talent.

Pros and cons of hiring contract workers

Now that you know the basics, let’s do a little pros and cons list of hiring contract employees. Bringing in contract workers offers numerous advantages for businesses, especially smaller companies or startups aiming to stay lean. However, there are also some downsides to consider.

Benefits:

• Cost savings: No need to cover employment benefits or payroll taxes – contractors manage their own self-employment taxes.
• More flexibility: Scale your team up or down based on project demands.
• Specialized expertise: Access niche skills without hiring full-time staff.
• Quick ramp-up: Contractors need minimal training and can start work right away.

Challenges:

• Limited commitment: Contract workers may not feel as deeply invested or connected to your company culture and long-term vision as permanent staff.
• Availability issues: As they often juggle multiple clients, contractors may not always be immediately available or exclusively dedicated when urgent needs arise.
• Potential communication gaps: Remote contractors might miss out on spontaneous team discussions or feel isolated from internal workflows, requiring proactive communication efforts.

Contract employees vs permanent employees: key differences

When hiring contract employees, it’s crucial to understand the legal risks involved. The Fair Labor Standards Act and IRS rules govern how workers should be classified and treated. Contract employees typically work on a temporary basis and provide services using their own business operations, but misclassification can result in significant penalties.

Unlike regular employees, contract workers are not typically eligible for the same benefits as internal employees. They operate their own business, manage their own taxes, and work according to contract terms rather than as part of your standard workforce.

Here’s a quick breakdown of the key differences:

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Legal considerations when hiring contract workers: why classification matters 

If someone is legally considered your employee, you’re required to withhold income taxes, pay social security tax and medicare tax, and often provide unemployment insurance. You must also issue a W-2 form for each employee. Independent contractors, on the other hand, handle their own taxes, and you typically don’t provide benefits or withhold employment taxes. Instead, you issue a 1099 form.

How to tell the difference

The Internal Revenue Service uses three primary categories to determine whether a worker is an employee or an independent contractor, emphasizing the “totality of the circumstances”:

• Behavioral control: Does your business control how the work is done (e.g., methods, schedule, tools used)?
• Financial control: Does your business control how the worker is paid, reimburse expenses, or supplies necessary tools and equipment?
• Type of relationship: Is there a written contract? Are benefits like vacation pay or insurance provided? Is the work ongoing and considered a key aspect of your business operations?

There’s no single deciding factor; businesses must analyze the entire employer-employee relationship and meticulously document their reasoning for classification.

Still unsure? Use form SS-8

If the status is unclear, either the business or the worker can submit Form SS-8 to the IRS to request an official determination. This process can take at least six months, so it’s best used in ongoing or repeated situations.

What if you get it wrong?

Employee misclassification – without a reasonable basis – can lead to significant tax penalties, including:

• repaying all employment taxes,
• a $50 fine per unfilled W-2 form,
• 3% of wages paid, plus 40% of unpaid FICA taxes,
• additional state and local fines, and potential wage law violations.

Want to fix it? The IRS offers a solution: the Voluntary Classification Settlement Program (VCSP). This program lets eligible businesses reclassify workers as employees for future tax periods, often with partial relief from federal employment taxes. To apply, businesses file Form 8952 and agree to treat those workers as employees going forward.

When should you hire a contract worker?

Taking the information into consideration, you now probably wonder – is hiring a contract employee worth it? And the answer is yes! Hiring a contractor makes sense when:

• You need help for a short-term or one-time project.
• The task requires a specific skill, so you don’t need permanent employees.
• You want to stay flexible with staffing and costs.
• You’re not ready to commit to permanent hires.

Best practices for working with contract workers

• Define the scope clearly: Outline specific responsibilities, deliverables, deadlines, and expected outcomes. Include everything in a written contract to avoid confusion later.
• Complete essential documentation: Ensure contracts, W-9s, and confidentiality agreement forms (if applicable) are signed before work begins. Use clear, professional language that protects both parties.
• Equip them from day one: Provide access to necessary tools, software, and internal systems. Share onboarding materials or training guides to help them get started quickly.

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• Make an introduction: Welcome them to the team and provide a brief overview of company values and culture. Include them in relevant meetings or communication channels where appropriate.
• Set clear expectations: Define timelines, milestones, and performance metrics. Make sure they know who to contact for feedback or questions.
• Maintain regular communication: Schedule brief check-ins to track progress and offer support. Keep lines of communication open for adjustments or feedback.
• Treat them as valued professionals: Respect their expertise and time. Foster a professional relationship that could lead to future collaborations.

💡Want to learn how to collaborate with contract employees? Read our article on 6 ways to manage contractors.

Conclusion on independent contractors

Contract workers can be a powerful asset for any business, offering expertise, speed, and cost efficiency – ideal for today’s dynamic work environment. However, it’s essential to understand their distinct role, respect legal boundaries, and establish clear agreements. With the right approach, collaborating with contract professionals can help your business grow smarter and faster, without the overhead of traditional hiring.