There are many similarities between an independent contractor and a temporary employee. Nevertheless, as a small business owner you need to understand the differences. Beyond a difference in job title, there are certain legal requirements, standards and obligations that differentiate an independent contractor from a temporary employee including tax implications and hiring practices.

What is a temporary employee?

A temporary employee is generally hired by a company to fill a temporary vacancy of another employee. This could be for any number of reasons such as maternity leave, an unexpected firing or needing seasonal help. Many times, organizations will use a staffing agency to find qualified candidates to fill for a temporary opening. This keeps the temporary employee off the company’s books —their employer of record is the agency. If temporary employees meet specific qualifications, certain tax subsidies allow employers to deduct them during tax season. Generally speaking, temporary employees are taken on to help complete short-term projects that require extra employees and are relieved of their duties as soon as the projects are done.

Furthermore, there are certain advantages to hiring a temporary employee over a contractor. If an employer keeps a contractor too long, it falls into violation of federal labor law. Independent contractors can only be used for up to a year before the law will consider them de facto employees. Also, temps sometimes get benefits from their agencies – and therefore are more satisfied with their situations. They might stay for longer and can be good candidates for recruitment and conversion.

What is an independent contractor?

Companies meet with and hire independent contractors themselves and don’t typically use a broker or agency. Independent contractors are often highly trained in their field of expertise whereas temporary employees are better suited to handling a variety of lower-skill duties. Independent contractors typically also work on specific assignments and projects after which they leave their client companies. The other key difference is that independent contractors negotiate their own hourly or per project fees.

1099 vs. W2

Independent contractors hold a different tax reporting status than temporary workers who receive W-2 tax statements as all employees do. Instead, independent contractors’ income is reported on Form 1099 – without taxes withheld. There are certain advantages and disadvantages that go along with these. Some of the key differences include:

  • A W2 lists the gross wages, taxes withheld, insurance payments and other transactions made between the employee and the company, whereas a 1099 simply shows how much the contractor has received from the company. That’s because the contractor is responsible for her own taxes.
  • When paying an employee, a business must pay payroll taxes including Medicare, Social Security and unemployment compensation insurance. However, this is not necessary for a 1099 contractor. This provides both administrative and financial relief to the business.

Shared benefits

While there are a number of key differences between independent contractors and temporary employees, there are a number of important advantages they both have over hiring full-time employees. For instance, both temporary employees and independent contractors usually have an area of expertise, although some work as administrative assistants such as mail clerks and other lower-paid, low-skill positions. Moreover, both are used to coming in at a moment’s notice and either fill in for an absent employee or get started on a project quickly.

The most distinct benefit is that your organization does not have to take on another fulltime employee, which can definitely help small businesses that are trying to keep costs down. Although costs per hour are often higher, your company has little to no time commitment.

Also, employers must pay payroll taxes, unemployment contributions and benefits, if a company has them. Businesses escape these costs and responsibilities with temporary labor. Furthermore, an employer is immune to unemployment insurance claims by temporary workers and contractors in addition to other legal liabilities that come with letting an employee go.