Hiring contract workers—who provide specialized services under contract—helps businesses complete projects without the resources needed to hire and retain traditional employees.
Here’s what you need to know if you’re considering hiring contract workers for your business.
Contract worker vs. employee: What’s the difference?
The key differences between contractors and employees lie in how they are paid and when and how they are expected to work.
Employees are on the company’s payroll, which means they receive wages or salary on a set schedule and the employer withholds federal income tax, Social Security tax, and Medicare tax. Independent contractors may be compensated per hour, per project, or via flat fee, often paid after the work is completed. The contractor is responsible for paying their own taxes, including self-employment tax.
Employers typically have a set and enforceable schedule for their internal employees and pay the employees at regular set intervals. Contract employees work their own hours, often submit an invoice to an employer, and are paid upon project completion. Internal employees get W-2 tax forms for tax filing and contract employees receive 1099 tax forms.
[Read more: W-2 vs. 1099 Contractors: Tax Differences Explained]
Common roles best suited for contract work
Contract work is an increasingly popular option across a range of industries, allowing businesses to access specialized skills without committing to permanent hires. It also provides professionals with flexibility, variety, and the ability to choose projects that align with their interests. Here are some of the most common roles well-suited for contract work:
- Graphic designer: Creates logos, branding materials, and marketing visuals.
- Social media marketer: Plans and manages content and ad strategies across social platforms.
- Copywriter: Crafts written content for websites, marketing campaigns, and ads.
- Virtual assistant: Provides administrative support remotely, including scheduling and communications.
- Financial consultant: Provides insight on budgeting, investments, and financial planning.
- Project manager: Oversees specific projects to ensure they stay on track and meet deadlines.
- Photographer/videographer: Captures and edits images and/or videos at events for marketing and branding purposes.
Benefits of contract workers
Many employers find contract workers highly beneficial for their business. Reviewing the benefits of hiring a contract worker will help with deciding if a contract worker is the best fit for your project.
- Tax savings: Employers of contract workers are not
responsible for deducting taxes for the contractors (the contract worker
is solely responsible for managing their own taxes) and do not have to
cover payroll taxes like they would for W-2 employees. This is one of
the largest time- and cost-savers for employers of contract workers. - Benefits savings: Contract workers typically do not
have benefits like health insurance, 401(k) plans, life insurance,
travel costs, or paid time off coverage provided by the employer. Not
needing to cover employee health care or paid time off benefits is a
significant saving for companies. - Equipment savings: Hiring contract workers who use
their own equipment means the company does not need to front the cost of
providing any equipment or office space to the worker. The contractor
can work from their own home and use their own vehicle, their own phone,
and their own tools or office equipment. - Shortened hiring and onboarding: Contract workers are
hired for particular projects, resulting in a significantly shorter
hiring, onboarding, and training process. This saves both time and money
for the employer, since onboarding can take one to two months and
training can take six months to a year for a full-time employee. - Reduced commitment and risk: The risk and commitment
involved with hiring a contract worker is much lower since the workers
are typically hired for a particular task for a set time frame—often a
short period. Because the contract worker is only employed for the
length of the project, there is no need to worry about long-term items
like satisfaction for retention and turnover rates. - Overtime savings: Contract workers get paid a set amount for the project, meaning they won’t accumulate overtime.
- Accessing skilled experts: Contract workers are
typically hired because they’re experts in their fields, so employers
get access to a highly skilled worker to complete the project without
having to internally train the worker to a certain skill level. For
example, if you don’t have a marketing expert for a specific promotion
you want to run, you can hire a contractor for the duration of the
promotion. - Time management: Employers do not have to manage
details like shifts and time off for contract workers. Not having to
define and manage what days and times contract workers are to be on the
clock or when they are on vacation means freeing up your time to focus
on bigger responsibilities.
[Read more: Tax Considerations for Gig Workers]
Contract workers are
hired for particular projects, resulting in a significantly shorter
hiring, onboarding, and training process.
How do you determine if someone is a contract worker?
As far as the IRS is concerned, there’s a fine line between an independent contractor relationship and an employer-employee relationship. If you misclassify an employee as an independent contractor, you could face penalties including back payment of unemployment taxes for the worker(s) in question.
Although a contract may state that a worker is an independent contractor, the IRS officially determines this based on how the parties work together. Major deciding factors include:
- Nature of the work: If the work performed is considered
a key business aspect (and thus if it’s more likely that the business
will have the right to direct and control the worker’s activities), it
might indicate the worker is an employee. Exceptions may exist in
certain industries, such as health care, where contract workers are
commonly hired on a flexible basis to fill staffing needs. - Payment, taxation, and benefits: Businesses generally
don’t pay benefits, withhold taxes, or provide equipment to independent
contractors. However, the absence of such benefits does not necessarily
mean the worker is an independent contractor. - Permanency of the relationship: If you hire a worker
with the intention of continuing the relationship indefinitely, it could
point to an employer-employee situation. - Autonomy: Independent contractors have more control over what they do as well as how and when they work.
If you’re unsure whether someone is an employee or a contract worker, consult an employment law attorney or check directly with the IRS to avoid potential issues.
Compliance and legal risks of hiring contractors
Employers hiring 1099 contractors must comply with specific tax and payment obligations. During onboarding, contractors should complete a Form W-9 (for U.S. residents) or Form W-8BEN (for foreign workers).
If a contractor earns $600 or more in a year, you will need to file Form 1099-NEC with the IRS and provide a copy to the contractor by January 31 of the following year. This form is based on information gathered from the W-9. If filing on paper, Form 1096 is also required.
While contract work offers flexibility, employers must be cautious of legal risks like misclassification, which can lead to audits, back taxes, and penalties. To reduce risking your business, follow these tips:
- Avoid misclassification. Don’t treat contractors like employees. Use IRS Form SS-8 if uncertain.
- Don’t micromanage. Focus on deliverables, not process or schedule.
- Use written contracts. Clearly define scope, payment, and timelines.
- Ensure contractor independence. Contractors should use their own tools and set their hours.
To stay compliant and avoid costly mistakes, consult with a legal or financial professional, or use a contractor management service.
How to onboard and manage contract employees
Onboarding contract employees isn’t just a formality; it’s your chance to set the stage for a productive, engaged working relationship. Here are a few steps to take to ensure a smooth start and long-term success:
- Prepare and sign key documentation. Before any work
begins, complete essential paperwork, including tax forms, contracts,
and confidentiality agreements. Clear documentation protects both
parties and sets expectations from the outset. - Provide access to tools and resources. To reduce
confusion and delays, make sure your contractor has everything they need
to hit the ground running—software, logins, training guides, and a
point of contact for questions. - Introduce them to your team and culture. A quick
welcome and brief overview of company values, communication norms, and
team dynamics can help contractors feel included and aligned with your
mission. - Set clear expectations and project goals. Define the
scope of work, deadlines, and performance metrics upfront. When
contractors know what success looks like, they’re more likely to meet—or
exceed—your expectations. - Schedule regular check-ins and feedback loops.
Consistent, two-way communication helps catch issues early, keep
projects on track, and build mutual trust throughout the relationship.
[Read more: How to Attract Contract Employees]
How to switch an employee from 1099 to W-2
Sometimes, a contractor’s role evolves beyond the projected work scope—for example, maybe they’ve become essential to your business and you’re ready to hire them as a full-time employee. Whatever the reason, making the switch from 1099 to W-2 involves a few key steps:
- Verify worker classification. Make sure the worker
meets employee status criteria. Use the Department of Labor’s six-part test and IRS
guidelines to confirm. Misclassification can lead to tax penalties and
audits. - Notify the worker. Communicate the change clearly and in writing. Document the date and method to ensure a smooth and transparent transition.
- Set up employee records. Collect necessary forms like W-4 and I-9, and update pay details such as rate, frequency, and exemption status.
Kirsten Capunay and Rebecca Rosenberg contributed to this article.
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Published
Callie Cook
