Employee Vs Contractor: What’s the Difference?

Most people know that there is a difference between an independent contractor and that of a standard employee, but how do you determine what that difference is? And why does it matter? Without thorough research you could find yourself in a bit of trouble, especially when it comes to tax and National Insurance payments. Here at ICS we are committed to making the lives of contractors easier, so here are the main differences between an ‘employee’ and an ‘independent contractor’.

The Employee Definition

You are classed as an employee if you are under a ‘contract of employment’ – be aware that a contract does not need to be in writing, it can also be verbal. Your contract will set out your working hours, tasks and duties – what is required from you in your role. As an employee, it is the responsibility of your employer to deduct income tax and National Insurance contributions from your salary before paying you. Employees have extra employment rights and responsibilities that may not apply to someone who is self employed and classed as a ‘contractor’ or ‘freelancer’. The typical, basic rights of employees include:

  • Maternity, paternity and adoption leave and pay.
  • Minimum notice period should they be dismissed by an employer.
  • Time off for emergencies.
  • Statutory redundancy and sick pay.

It is important to note that some of these rights may only become effective after an employee has been working for a company for a specific amount of time.

Defining a Contractor

As a contractor you should be recognised a self-employed worker providing services to a client on a time or project based contract. Your working hours should not be fixed and you would not receive the range of employee benefits that a client may offer to their permanent staff. Although, the definition of an independent contractor varies, contractors are certainly not employees. If you are self-employed or trading via a limited company you are often able to pay yourself more tax efficiently than employees. Contractors do not have PAYE or class 1 national insurance contributions deducted by their client and are responsible for making these payments themselves.

Typically a contractor will possess specialist skills for example; graphic design, IT skills or project management. More often than not a contractor will work for a company on a short contract, although it is possible to be contracted for a lengthier period of time and some may try to set your working hours. This is where the lines of employee and contractor can become blurred, as it is possible that you should technically be defined as an ‘employee’ of the company you are contracted to. In the UK all independent contractors (and companies who use them) must be aware of IR35 tax legislation which was introduced in the year 2000. The purpose of this legislation is to seek out these ‘disguised employees’. To find out more about IR35 and how it affects contractors, click here to download our comprehensive guide.

There are both plus and negative points when it comes to setting up independently as a contractor. ICS are the contractor pay experts; we understand all the legislation and regulation surrounding contractors and have a range of payroll and accountancy services to match your needs. As part of our service we also offer comprehensive IR35 advice and even a FREE IR35 contract review.

Understanding contractors since 2002, Think ICS.