Independent contractor vs employee: what’s best for your business

In this guide, you’ll learn:

• The difference between independent contractors and employees
• How to determine employment status.
• How to manage contractors safely, even across borders.

Let’s break it down!

Independent contractor vs employee: the key differences

Before classifying a new worker, you need to understand the core difference between an independent contractor and an employee. It’s not just about titles, it’s about control, responsibilities, and legal risk. Here’s how the independent contractor vs employee roles compare in real life.

What is an independent contractor?

An independent contractor is a service provider who runs their own business. They decide how to do the work, set their own hours, and use their own tools or space. They may provide similar services to multiple clients, not just you.

Contractors are not tied to your business location or schedule. They invoice you for services provided and handle their own income taxes and liability insurance. They don’t get employee-type benefits.

Many independent contractors provide the same or similar services to multiple businesses in their industry.

What is an employee?

An employee works under your control. You decide how, when, and where the job is done. You provide tools, set the schedule, and supervise the work.

Employees are part of your employer’s business. They get employee-type benefits like health insurance, paid time off, and sometimes overtime pay. Unlike contractors, employees are protected by minimum wage laws and other labor regulations.

You withhold income taxes, pay social security, and cover unemployment taxes. The employer-employee relationship is characterized by a higher level of control and oversight than contractor arrangements.

When a company invests in a worker’s training, equipment, and workspace, this typically indicates an employment relationship.

Feature	Employee	Independent contractor
Work Control	Employer	Contractor
Tools & Equipment	Employer provides	Own tools/space
Schedule	Set by the employer	Own hours
Payment	Salary/wages	Per project/milestone
Benefits	Yes (health, PTO, etc.)	No
Taxes	Employer withholds	Contractor pays own
Multiple Clients	Usually no	Often yes
Business Relationship	Part of the employer’s business	Independent business
Social Security/Unemployment	Employer pays	Contractor pays own

How to determine employment status

You must determine employment status before hiring. To determine employee status, the IRS uses multiple factors to decide if a worker is an employee or an independent contractor. 

No single factor determines status. Instead, you look at the whole working relationship. The degree of control over a worker’s job tasks and methods is crucial in determining their classification.

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Key aspects to consider

• Behavioral control. Do you control how the worker does the job? If yes, it’s likely an employee. When a worker regularly agrees to follow set schedules and procedures, this often indicates employee status rather than independent contractor status.
• Control over the job site. Contractors typically work from their own location, while employees work at employer-designated spaces.
• Financial control. Who decides how the worker is paid, who provides tools, and who covers expenses? Contractors usually use their own tools and set their own rates. When workers are economically dependent on a single business for their income, this may indicate employee status rather than contractor status.
• Type of relationship. Is there a written contract? Are you providing employee-type benefits? Is the relationship ongoing or project-based?
• Managerial skill. Does the worker exercise managerial skill, hire helpers, or negotiate contracts with other businesses? This points to independent contractor status.
• Business aspects. Does the worker have an independently established trade or own business? Do they offer such services to other clients?

Example: A registered nurse using your equipment, working your schedule, and receiving steady pay likely has employee status, even with a contract. On the other hand, a freelance nurse consultant working from their own location, setting their own hours, and billing multiple clients can qualify as a contractor.

Remember: No single factor determines status. The IRS looks at the whole working relationship.

» For more details, check the IRS Worker Classification Guide.

Risks of misclassification for your business

Treating workers as contractors when they should be employees isn’t just a paperwork error. It’s a compliance issue, and it can cost you.

What happens if you misclassify?

You may face:

• Back taxes (income, Social Security, unemployment taxes).
• Penalties under the Fair Labor Standards Act (FLSA).
• Fines for not providing employee benefits (health insurance, PTO).
• Audits from the IRS or the Department of Labor.
• Lawsuits from misclassified workers.

Even if it’s an honest mistake, you’re still responsible.

Industry examples

Some sectors face extra scrutiny, especially when roles blur the line between contractor and employee. These include:

• Construction industry (e.g., electricians, welders).
• IT and tech consulting.
• Healthcare (e.g,. nurses, therapists).
• Creative services (e.g,. designers, writers).

Example: If a construction firm hires a registered nurse as an “independent contractor” but controls their hours, provides all tools, and offers employee benefits, the IRS may decide an employment relationship exists. The company could owe back taxes and penalties.

Tip: Regular work, control over hours, and using your tools = likely employee.

» Employee misclassification: 10 things every employer should know

Checklist: How to check worker status

Not sure how to classify someone? Use this checklist to spot the difference based on real working conditions. Each individual worker’s situation must be evaluated separately, as circumstances can vary significantly even within the same role.

When it makes sense to hire an independent contractor

Hiring an independent contractor isn’t just about cutting costs. It’s a smart move when you need flexibility, speed, specialized skills, or for certain jobs. Here’s when it works best.

For project-based or short-term work

Need someone for a landing page, a legal review, or a one-off video edit?
Contractors are ideal for tasks that have a clear start and end.

When the worker has their own business

Many contractors have an independently established trade. They:

• Set their own hours.
• Use own tools and workspace.
• Take on multiple clients.
• Handle taxes on their own.

Independent contractors often serve multiple corporate clients simultaneously, maintaining their business independence.

When you don’t want to deal with payroll or benefits

Contractors don’t get employee-type benefits like health insurance or paid leave. You pay them for services provided, and that’s it.

When you need highly specialized skills

Independent contractors are often highly skilled technically. They bring in-demand knowledge without long onboarding.

Example: You run a small SaaS product. You need help setting up GDPR compliance.

Hiring an independent contractor with specialized skills for a 4-week audit, who also purchases material, makes more sense than training a new employee.

Employee or independent contractor: pros and cons

Best practices for working with independent contractors

1. Use a written contract

Always sign a written contract. Define the scope of work, payment terms, deadlines, and who owns the work performed. Make it clear that the worker is an independent contractor responsible for their taxes.

2. Respect independence

Let contractors set their own hours, use their own tools, and decide how to do the job while performing services. Don’t treat them like employees. Focus on results, not the process.

3. Pay per project or milestone

Avoid regular salaries. Pay per project, milestone, or invoice. This supports the independent contractor relationship.

4. Collect the right tax forms

• For U.S. contractors: Get a W-9 and issue a 1099-NEC if you pay over $600/year.
• For international contractors: Get a W-8BEN to confirm non-U.S. residency.

5. Keep good records

Store all contracts, invoices, and payment records. This protects you in case of an audit or dispute.

6. Use reliable payment methods

Choose secure payment methods that support international transactions. Timely payments help you build trust and keep top talent.

As a contractor who works with independent pros all the time, I can tell you that the make-or-break factor is setting expectations early. Projects work effectively when expectations are clearly stated up front, including scope, timeline, and communication. You get better work, fewer surprises, and a connection you can truly rely on when you treat contractors like partners rather than placeholders. In the end, you are investing in someone with professionalism, pride, and talent rather than only purchasing labor.
– Comments Ben Green, CEO of Green Leaf Air

Onboarding and payment tips

How to onboard an independent contractor fast

• Use a clear written contract. Define the scope, deadlines, and payment terms.
• Share project details and communication channels.
• Let the contractor use their own tools and set their own hours.

Best payment practices

• Pay per project, milestone, or retainer. Avoid regular salaries.
• Use secure payment methods: wire transfer, ACH, or another platform.
• International contractors should use platforms that handle currency and compliance.
• Always collect the right tax forms (W-9, 1099-NEC, W-8BEN).

Check out → Hiring international employees: legal, tax, and global payroll tips for U.S. companies

How Useme helps you work with independent contractors safely

When working with contractors, especially internationally, things can get messy as they move on to their next job. You need contracts, tax forms, compliant payments, and a way to manage everything. That’s where Useme comes in.

Useme helps you:

• Legally settle deals with contractors, even if they don’t run a registered business.
• Collaborate and pay in one place.
• Get a single invoice (Useme resells the work to you).
• Stay compliant with local and international regulations.
• Make fast payments in multiple currencies.

What does it mean for your business?

1. Less admin. Useme collects data, signs contracts, and verifies freelancers.
2. More security. A legal agreement backs every project.
3. Faster payments. No chasing invoices or delays.
4. All-in-one platform. Track files, deadlines, and payment history.

Bonus: You don’t need to navigate foreign laws, register abroad, or deal with country-specific taxes. With Useme, your business stays safe, and your contractor cooperation stays smooth.

Summary: employee or an independent contractor

Choosing between an independent contractor and an employee is a key business decision. Get it right, and you’ll gain flexibility, access to specialized skills, and cost savings. Get it wrong, and you’ll risk fines, back taxes, and legal trouble. Always determine employment status carefully, use written contracts, and respect the contractor’s independence. 

If you want to make managing independent contractors easy, secure, and compliant, especially for international projects, Useme is your solution. You can find, hire, and pay independent contractors with confidence, knowing your business is protected every step of the way. Ready to simplify your contractor management? 

Check out Useme and see how we can help your business grow.

Disclaimer: This material is for informational purposes only and doesn’t constitute legal or tax advice. For the latest regulations, please consult the IRS or a qualified advisor.