Independent contractor vs employee: A simple guide

As more businesses scale across borders and tap into flexible, remote talent, the line between an independent contractor vs employee can feel increasingly blurred. It’s no longer just a legal distinction—it shapes how you manage taxes, benefits, and long-term obligations.

That’s why getting worker classification right is more important than ever. Missteps can lead to costly fines, compliance issues, or unexpected liabilities.

To clear things up, we’ve put together a simple, side-by-side breakdown of the key differences between independent contractors and employees, so you can make smart, compliant hiring decisions as your business grows.

Independent contractor vs employee: What global businesses need to know

The distinction between an independent contractor vs employee centers on control and tax obligations. Contractors work independently and handle their own taxes, while employees follow employer direction, have set hours, and receive benefits with tax withholdings. Misclassification can result in serious legal and financial consequences.

The table below highlights the key differences.

Independent contractor vs employee: Key differences at a glance

Criteria	Independent contractor	Employee
Control over work	Contractor-controlled	Employer-controlled
Tax responsibility	The contractor pays their own taxes	Employer withholds taxes
Benefits eligibility	Not eligible	Typically eligible
Long-term commitment	Project-based or short-term	Ongoing
Legal protections	Limited	Complete labor law coverage

Who is an Independent Contractor?

An independent contractor is a self-employed individual who operates through their own business entity. Unlike traditional employees, they aren’t on a company’s payroll and usually work on a project-by-project or retainer basis.

They typically:

• Set their own schedule and work independently
• Use their own tools and equipment
• Handle their own taxes and insurance
• Aren’t entitled to benefits like healthcare, retirement plans, or paid leave

Independent contractors offer flexibility for both themselves and the businesses they work with, but that freedom also comes with added responsibility.

Who is an Employee?

An employee is hired directly by a company under a formal employment agreement. They’re part of the organization’s structure and typically receive a regular salary or hourly wage.

Employees generally:

• Work under company supervision and follow internal policies
• Receive training and ongoing support from the employer
• Are eligible for benefits like health insurance, retirement plans, and paid time off
• Have their taxes withheld and paid on their behalf by their employer
• Are protected by local labor laws, including wage standards and termination rights

This setup allows them to enjoy more stability and legal protections than independent contractors, but it also comes with stricter rules around how work is assigned and performed.

Why classification matters

As we’ve mentioned, there are several essential reasons why employers need to classify their workers correctly. In the table below, we explain those reasons and why they matter.

Reason	Why it Matters
Legal Compliance	Minimize fines, lawsuits, and penalties for misclassifying workers under labor laws.
Tax Obligations	Misclassification can lead to back taxes, interest, and payroll tax liabilities.
Risk of Reputational Damage	Labor disputes or government action can damage your company’s credibility and brand.
Cost Structure and Planning	Employees come with fixed costs (benefits, leave, insurance); contractors allow for flexible budgeting.
Global Expansion	Proper classification is essential when expanding internationally to stay compliant across borders.

Worker classification checklist for employers

Simplifying global contractor payments with Payoneer Workforce Management

Managing a global workforce sounds simple—until you’re juggling tax laws, labor rules, and compliance in multiple countries. That’s where Payoneer Workforce Management offers a way to streamline contractor management.

With Payoneer Workforce Management, businesses can seamlessly pay contractors and freelancers in 160+ countries and 70 currencies with support to mitigate misclassification risks.

As remote work becomes the norm, hiring globally is becoming increasingly strategic for growing businesses. However, knowing the difference between an independent contractor vs employee isn’t always cut and dry. It depends on where your team lives, how they work, and how you engage them.

Classification isn’t just a legal formality—it’s the backbone of efficient, sustainable growth.

Ready to grow your business by managing global contractors? Schedule a free demo today to learn how we can simplify your global workforce payments.

FAQs

1. How does the IRS determine whether someone is an independent contractor?

The IRS looks at three main factors: behavioral control, financial control, and the relationship between the worker and the business. If the worker controls how the work is done, uses their own tools, and is not treated like an employee, they are likely an independent contractor.

2. Can an individual be both an employee and an independent contractor?

Yes, but only if the roles are completely separate. The contractor’s work must be outside the scope of their employee duties and meet IRS criteria for independent contractors to avoid misclassification.

3. What is the ABC rule for independent contractors?

The ABC rule is a legal test used in some states to determine if a worker is truly an independent contractor. To qualify, the worker must:

A) be free from control and direction,

B) perform work outside the usual business of the employer, and

C) be independently established in that trade or business.

All three conditions must be met.