Contract Worker Benefits for Employers and Contractors

When hiring for a new position, how do you determine if you need a traditional employee or an independent contractor? W-2 employees, also called permanent or traditional employees, work full-time or part-time for one employer, have taxes withheld from their paycheck, receive benefits, and how, when, and where they work is controlled by the employer.

1099 contractors, also called independent contractors, self-employed, or temporary workers, do not have taxes withheld from their pay and are responsible for paying estimated and self-employment taxes. They work for a specified period that may be either short-term or long-term. Independent contractors have control over how, when, and where they work and may work for multiple clients.

Contractors are sometimes referred to as freelancers. However, usually freelancers work on a project-by-project basis for multiple clients, while contractors work for a longer period for one or more clients. Both freelancers and contractors are temporary workers. Some temporary or seasonal workers can be classified as W-2 employees.

How to avoid misclassifying workers

Employers may face penalties if they misclassify workers, so it is imperative to know the difference and seek expert guidance to classify correctly. According to the IRS, “Facts that provide evidence of the degree of control and independence fall into three categories: behavioral, financial and type of relationship.”

“If you’re unsure how to classify your employees, you can file a Form SS-8 with the IRS. They’ll review the nature of the relationship between your company and the employee and give you an official determination. This process can take several months to complete, but it may be worth the wait if you want to hire many workers with the same roles and responsibilities. If you need to quickly determine how to classify a worker, consult with an employment attorney or tax professional.”  – U.S. Chamber of Commerce

Benefits for workers

Independent contractors receive many advantages, especially with flexible schedules and work environments. They may become digital nomads, traveling and working from anywhere where they are legally allowed to go and work.

Flexibility

Work-life balance is a major perk of being a contractor. Not only do you get to choose your schedule, but you can ensure that it does not interfere with your personal commitments. From caring for your family or continuing your education to managing health and wellness, you have the power to be available for what you want to do.

Less commitment

When you accept a contract position, you are not signing your life away or getting stuck long-term in a potentially toxic company culture. This temporary arrangement provides a fantastic opportunity to evaluate the workload, expectations, company culture and managers.

Expand skills and portfolio

Skills-based hiring has become increasingly popular. Some employers prefer candidates with transferable skills over specific job experience. Contract work provides an opportunity to apply skills in a new setting while expanding portfolios. Contractors can even gain the necessary experience for advancements and career changes.

Gain experience in different industries

Many job listings do require previous experience in a specific industry or in a specific role. This can be a challenge for experienced job seekers looking to use their skills in new ways or different industries. For example, a digital marketer who worked directly for B2C companies may be looking to gain experience in a B2B account manager role. Contract workers get valuable experience applying their skillset in many industries and positions, thus making them more desirable candidates for future W-2 employment or long-term contract work.

Easier to find work

For niche workers, it can be easier to find work as independent contractors, as employers often need highly skilled experts periodically for short-term projects. Employers may have budget constraints, only allowing them to pay high rates for a limited period.

However, with the rise in contract workers and the stiff competition, it can still be a challenge for some contractors to secure work. For example, many freelance platforms are flooded with writers and digital marketers competing for the same low-paying opportunities. It takes creativity, persistence and networking to stand out from the crowd to land contract jobs.

More flexibility in negotiating pay

Contractors can set their rates. Depending on the nature of the contract work, they may offer hourly rates or project rates. They can customize their rates based on the company size and scope of the work. Niche workers are in high demand, offering them greater leverage in negotiations. In other cases, employers who frequently collaborate with long-term contractors may have less flexibility in what they can pay.

May transition to full-time employment

Many job listings for independent contractors entice candidates with the prospect of converting to a full-time employee in the future. For many, this is the biggest reward of contract work and the reason they accept these jobs. Many new openings for W-2 employees go to people who previously collaborated with the company, so contractors have a major advantage. For others who are looking to remain as contractors with part-time hours, this can be a negative. The reality is that there are no guarantees with contract work, so it is best viewed as a good opportunity that may lead to more things.

Customizable work environment to fit your needs

Workers have much less control and flexibility when forced to work in a physical workspace onsite for an employer. Noisy open offices present challenges for many workers, especially neurodivergent workers.

“The scholarly consensus on open offices is uniformly negative and the move to open offices comes with many detrimental impacts on employee well-being, organizational health, and work output,” explained Meredith Farkas, an academic librarian.

On the other hand, independent contractors who work from home can customize the best workspace for their needs. From the temperature, lighting and ambient noise to favorite devices and ergonomic products, contract workers have full control of their environment. Plus, remote workers save valuable time and money by not having to commute or buy business clothes.

Benefits for companies

Employers benefit from significant cost and time savings by working with contractors instead of hiring W-2 employees.

Cost savings

When working with contractors, employers save many hard and soft costs associated with hiring employees. Based on information shared by Insight Global, hard costs can be 50% more than the first-year salary. Soft costs include time, onboarding and training in addition to added costs for new hires who quickly quit. Employers avoid the expenses of benefits, payroll taxes, overtime and paid holidays for contractors.

Office space and equipment savings

With many offices facing a shortage of workspace and the prohibitive costs of expanding, remote contract work solves the space problem. Providing office equipment for each employee can be costly. Contractors pay for their own equipment.

Highly skilled, niche workers

Paying salaries for highly specialized workers is costly. While hiring requests may not be approved for niche workers, requests for short-term contractors are more likely to receive management approval. Niche workers often have high hourly rates that would be unsustainable as W-2 employees.

Easier and faster hiring, training, and management

Simply put, employers experience considerable time savings when working with contractors. New employees require onboarding, training and regular supervision. Employee retention is a critical consideration at every stage of the employee lifecycle. On the other hand, training contractors for a project is fast and easy.

Lower risk and investment

Employers face lower risks and less investment with contract workers. When contractors are later converted into W-2 employees, employers save additional hiring and training costs. Using contractors allows employers to assess workers before hiring them full-time, thus it is a smart investment with a new hire who is more likely to stay long-term with the company.

According to onboarding stats shared by Devlin Peck, “20% of employees quit within the first 45 days of employment, and replacing an employee costs an organization 21% of their annual salary.” The quality of the onboarding experience has a direct impact on how long employees may stay at a company. Contract-to-hire arrangements offer a less risky approach for new hires.

Quicker results

Employers can reach project goals more easily and quickly with contractors. Whether it is a pressing need for a graphic designer or a public relations expert, contract workers deliver quick and effective results tailored to your needs.

Both employers and contractors reap many benefits from contract work. Contractors gain valuable experience while enjoying a healthy work-life balance. By spending less on expenses, resources, and time, employers fill skill gaps and gain quick results from niche contract workers.