What Is a Contract Employee?

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In today's workforce, different types of employees exist. Whether someone is an employer or a worker, it's important to know the specifics of each business relationship. This has a bearing on taxes, benefits and contractual obligations. Unlike a common-law or statutory employee, a contract employee (or contract worker) is not considered to be a regular or permanent member of staff.

Contract Worker Definition

No single contract worker definition exists, and the term may be used interchangeably with the terms i_ndependent contractor, freelancer_ or work-for-hire staffer. However, it's largely accepted that a contract employee is a person hired for a specific job at a specific rate of pay and, sometimes, for a specific time period. For tax purposes, that person is self-employed.

The use of contract employees instead of part-time or full-time permanent staff is becoming more common, sometimes for financial reasons and sometimes because a contract employee has a very specialized skill set. Many companies hire both in-house permanent staff and contract workers.

The IRS states no universal definition of an independent contractor exists and points out that factors that apply in one situation might not apply in another. When deciding if a person is an independent contractor, the IRS advises to look at the employer/worker relationship as a whole and consider how much control the company has over what the worker does, how the worker performs his job, and how the worker is paid.

Asking the IRS to Make an Official Decision

If it's difficult to determine whether a worker is an in-house employee of the company or a contract employee, either the business or the worker can file Form SS-8, which the IRS will review to make an official decision on the worker’s status.

Contract Employee Rights

Under the law, a contract employee is not entitled to the same benefits as a permanent staff member, such as Social Security, workers' compensation, health benefits, unemployment benefits, sick leave, vacation time, retirement or profit-sharing. In the matter of taxes, the only obligation the employer is under is to issue a Form 1099 to the contract worker in compliance with IRS tax-filing deadlines.

Benefits of Contract Employees

Hiring contract employees provides a company with many benefits. For instance, it's a flexible option, allowing employers to hire workers for short-term projects as needed. Because the employer does not pay benefits to the contract worker, overheads are lower. If there isn't an in-house employee with the skill set necessary for a particular project or task, a contract employee can meet that need.

Contract employees are also good for seasonal help, for example, when a hotel needs additional workers during the particularly busy months of the year. It's more sensible and cost-effective to hire a short-term worker than another permanent member of staff.

Additionally, it's not always necessary to provide contract workers with office space or equipment, as they often work remotely and have their own computer and other equipment.

Read More: Contract Employment and Unemployment Benefits

Potential Downsides of Contract Employees

There are, however, some reasons an employer might not want to hire a contract worker. Since the worker is not a permanent member of staff, he's unlikely to have the same sense of loyalty toward the company. Also, contract workers often work for more than one employer at the same time. They are legally entitled to do this, but it means they might not be available when required.

Contract employees who work remotely might not feel as if they're part of the team or be able to build relationships with customers as in-house workers do. It may take a contract employee a little time to get used to the way the company works, which may cause delays in some areas.