Contractual Employee vs. Permanent Employee

(Last Updated On: April 19, 2021)

Being willing to work as a contractor or a full-time employee opens up many more job and career opportunities for you. There is always debate over contractual employee vs permanent employee.

The difference between these types of terms is not just the absence or presence of a contract, but the legal and tax inclusion.

contractual employee vs permanent employee

Understanding the difference between contract work and employment contracts will help you make the right decisions about your career choice.

The contractor

A contractor, also called an individual contractor, is often mistakenly referred to as a contract employee, someone who works for a project or business on a limited basis.

For example, an employer can hire a graphic designer for a project, rather than hiring a designer to work in the office.

The contract can be for a one-time project or a contract that allows the business to hire designers frequently without having to enter a new contract each time.


An employee works full-time or part-time for a business and is under federal and state employment law that includes salaries, benefits, termination procedures and taxes. Generally, an employee will not be allowed to work as an employer’s competitor.

Working conditions

By law, contractors have more freedom to work.

If an employer has too many restrictions or instructions on how the contractor works, the worker may be classified as an employee under the IRS code.

For example, businesses that use contractors do not allow their contractors to work on the site, use the owner’s equipment, perform the job properly, and schedule the contractor.

An employee must adhere to more stringent employer rules, how, where and when employers work within the confines of the law.


Contractors often deal with a verbal commitment after a handshake or initial contract signing. Contractors should always try to get a work contract in writing, at least in the form of an email.

Contractors often ask for deposits before starting work, with final payments after the project is completed.

Employees usually sign an agreement as soon as they start work. An employee may or may not rewrite the contract if employees receive a raise or their benefits vary.

Employees are eligible for company benefits such as health insurance, while contractors are not.

The effect of taxes

Because many employers use contract workers to reduce or avoid taxes, the IRS has set standards to prevent businesses from abusing this classification.

If an employer treats a contractor in the same manner as an employee, such as scheduling work, providing equipment and workplace, and determining how the work is done, a contractor may be able to successfully sue for employee benefits and back taxes.

Employees pay .6.66 percent of their salary on payroll, while their employer pays another .6.66 percent.

Employers pay workers’ compensation and federal and state unemployment taxes for their employees, who are eligible to pay unemployment if they lose their jobs.

Businesses pay no fees when using contractors, who pay 13.3 percent on self-employment charges for the first 6 $ 106,800 they have earned as of 2012.

Contract contractors are not able to collect unemployment benefits. Independent contractors can itemize and cut business expenses such as mileage, home office, internet, phone, computer equipment, food and entertainment, and other work-related expenses. I hope this article on contractual employee vs permanent employee was useful to you.

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