Independent Contractor vs. Self-Employed

Just as all squares are rectangles but not all rectangles are squares, the same nuanced relationship exists between independent contractors and self-employed individuals. 

While all independent contractors fall under the umbrella of self-employment, the reverse is not true. When it comes to hiring, both categories may seem identical. Still, navigating these differences is crucial for maintaining legal and tax compliance, safeguarding your business and the professionals you engage with.

In this blog, we’ll explore the key differences between self-employed and independent contractors and guide you with the one your business should opt for. Let’s dive in!  

What is an Independent Contractor? 

An independent contractor is a professional who provides specialized services to a business or individual under the terms of a contract or a verbal agreement. Unlike traditional employees, independent contractors operate as their own business entities, taking full responsibility for their taxes, benefits, and liabilities. 

In the United States, an independent contractor is defined based on specific criteria set forth by the Internal Revenue Service (IRS) and the Department of Labor (DOL). These criteria revolve around,

Degree of control the hiring entity has over the worker - Does the employer control or have the right to control what the worker does and how?

Employer-worker relationship - Is there a written employment agreement contract? Will the relationship continue? Are there worker benefits like pension plans, insurance, paid leave, etc.?

Financial arrangements between the parties - Does the employer determine and control how workers are paid, reimbursements, resources and supplies, etc.?

Independent contractors in the U.S. span a wide range of industries and professions. However, some common categories frequently encountered include:

• Freelance Writers and Designers
• Business, tech or Marketing consultants
• Tradespeople like electricians, plumbers, and carpenters 
• IT Professionals
• Healthcare Providers
• Real Estate Agents
• Legal Professionals
• Sales and Marketing Experts
• Transport and Logistics

Does self-employed mean independent contractor?

No, being self-employed does not necessarily mean being an independent contractor. While all independent contractors are self-employed, not all self-employed individuals are independent contractors. Self-employment is a general classification of how someone earns their income and does not necessarily imply a contractual relationship with another business. 

For example, a freelance graphic designer hired to create a logo for a company is an independent contractor (who is self-employed, offering freelance design services) hired for a specific time frame in a company. The relationship typically ends once the project is complete unless another contract is established. 

In contrast, a personal trainer who owns a gym is self-employed but not an independent contractor. They offer services like fitness classes, personal training sessions, and diet plans to multiple clients.

How to differentiate self-employed vs. independent contractors? 

In the United States, there are specific categories that help differentiate between Independent Contractors and Self-Employed individuals:

1. Type of Relationship: Independent contractors usually have a defined project or timeframe for their services, while self-employed individuals may have a more ongoing, less defined relationship with their clients.
2. Nature of Work: Independent contractors are often hired for specialized tasks or projects, while self-employed individuals may offer a broader range of services.
3. Tax Implications: Independent contractors are responsible for their own taxes and usually receive a 1099 form. Self-employed individuals have different tax responsibilities depending on their business structure.

Independent Contractor vs. Self-Employed Individual - Key Differences & Similarities 

Before we explore the independent contractor vs. self-employed differences, they share some similarities.

• Both independent contractors and self-employed individuals are responsible for their own taxes.
• They are not considered employees of a company.  They are individual entities collaborating with organizations and end-consumers.
• Independent contractors and self-employed individuals can deduct business-related expenses for tax purposes, such as business set-up costs, advertising expenses, insurance, licenses, etc.

Now, let’s look at the differences between independent contractors and self-employed individuals.

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Self-Employed vs. Independent Contractors - How to choose as a business owner?

In the quest for top-tier talent, you're faced with a pivotal choice: the project-specific expertise of an independent contractor or the adaptable, client-focused services of a self-employed individual. Each comes with its own set of advantages and caveats. So, how do you decide? Here, we dissect the pros and cons, giving you the insights to make a strategic hire.

Independent Contractor

Pros:

1. Specialized Skills: Contractors often have specialized skills that can be utilized for specific projects.
2. Cost-Effective: Generally, contractors charge a higher hourly price but can be more cost-effective in the long run as you’re not responsible for benefits and taxes.
3. Flexibility: Easier to hire and terminate based on project needs.

Cons:

1. Limited Control: You have less control over how they complete their work.
2. Availability: May not be available for long-term commitments.

💡Read about hiring independent contractors in this guide. 

Self-Employed Individual

Pros:

1. Versatility: Often capable of handling a broader range of tasks.
2. Full Control: More control over how tasks are completed.
3. Long-Term Relationship: Easier to build a long-term working relationship.

Cons:

1. Cost: It may require a more traditional employment setup, including benefits and taxes.
2. Less Specialized: Might not have as specialized skills as a contractor.

Which One to Choose?

For specialized, short-term projects: Independent Contractors are often the better choice.

For long-term, varied tasks: A Self-Employed individual (or business) may be more suitable. 

Wrapping up

No matter what your business needs demand, finding the right expert to add value to your organization is difficult. There’s a lot involved in identifying the right talent and onboarding them. 

However, with Gloroots EOR services, onboarding independent contractors is easy. Gloroots is an all-in-one platform that manages onboarding, payroll, and compliance. With Gloroots, you can

• Onboard faster with automatic contract generation and a tracking dashboard.
• Pay your contractors on time in multiple currencies.
• Maintain 100% compliance in hiring, taxation, and payroll. 
• Get visibility into how your resources are being used and the EOR fee breakdown.

The best part? Gloroots accepts Crypto payins, making payments easier for employers. 

Ready for a hassle-free contractor management experience? Connect with Gloroots now!