A contractor, also called a freelancer or contract worker, is an individual who operates independently on a contractual basis. They are not employees. Their legal status can be a self-employed entity, a limited liability partnership or company, or a sole proprietorship.
Companies and organizations contract them to work on particular assignments or projects. They can have short- or long-term contracts. They can work for a company and receive payment for their services but are technically not on the payroll. They usually work for more than one organization at a time.
The main differences: Payments, benefits, taxation
The essential difference between contractors and employees lies in how they are paid. The organization pays the contractor an agreed-upon wage for their services but does not pay or withhold taxes. The contractor pays their own taxes, including self-employment tax, if applicable, and federal income tax. Moreover, they are responsible for paying any benefits they want, including health insurance.
An employee is on a company’s payroll, so the employer pays their salary and withholds the relevant taxes (Medicare, Social Security, federal income tax). Most employers pay for employee benefits, too.
Benefits of a payroll service
Benefits can be compulsory by law, like paid leave, health insurance, childcare benefits, and many more. So many, in fact, that it can be overwhelming. Payroll services can help you track taxes, benefits, and other employee-related aspects.
These services take over payroll process management for businesses, handling everything from payroll tax obligations to employee payments. Service providers let organizations retain a specific level of control, taking over the whole payroll process or only part of it.
Software tools monitor payroll processing and costs
A payroll service tends to come with access to payroll software systems and tools. Those monitor payroll processing and its cost per cycle. Some organizations provide the flexibility of processing international employee payments, but most are focused on the home market and provide only basic support for paying contractors overseas.
The best payroll software integrates with attendance and time systems and accounting software, sharing data to reduce mistakes and the need for double entry. It’s sometimes sold together with HR software, but the best providers make payroll tools available separately.
Some software also records tax liabilities. The leading providers take care of paperwork reporting within the appropriate jurisdictions.
Online payroll software can automate payroll processes and assist in filing taxes at the corresponding intervals.
Knowing the payroll risks
Payroll is frequently one of the biggest expenses a company incurs, and efforts to manage it can lead to all kinds of frustration. Payroll errors take a lot of time to fix and can harm employee satisfaction levels. That’s why many companies turn to a payroll service for processing. The most basic services are only capable of making calculations. Higher-end ones let users automate payroll and make filing taxes simpler.
When selecting a service for your payroll needs, go for one that can handle all aspects of your salary payments.
Other differences between employees and contractors
Payment is one of many differences between an employee and an independent contractor. Contractors have more freedom. Businesses hire employees to perform specific tasks in their direction. Contractors typically get a project or a job to work on, and the company intervenes minimally in the execution.
Training and onboarding processes also differ greatly between employees and contractors. An organization often expects contractors to focus on a specific job, so it often gives only the information needed to complete that job. It’s different with full-time employees. They are subject to a prolonged onboarding process to understand the company’s overall goals, culture, and team dynamics.