$100,000 a year per American job — that’s how much tech companies can save by hiring a contractor instead of a full-time employee, according to the New York Times. It can also be easier to hire quickly for a contractor position than for a full-time employee role.

On the other hand, hiring contractors can bring certain challenges. Because they set their own hours, work on an as-needed basis, and may work with multiple companies at once, they may be less engaged with your company and brand than full-time workers — and they may be harder to retain for longer or repeat projects.

While hiring contractors could help your business save on payroll and move quickly, hiring full-time employees can mean better retention and long-term consistency.

4 key differences between contractors and full-time employees

By definition, in the U.S., the difference between a contractor and a full-time employee boils down to three aspects: behavioral control, financial control, and the nature of the relationship.

According to the IRS, employers must consider the overall degree of control and independence across all of these areas — no single factor automatically settles the question.

Behavioral control: Businesses have the right to direct and control how employees do their jobs, including when, where, and how they work. Contractors decide for themselves.
Financial control: Contractors typically have more say in how they’re paid and what they charge. Employers determine that for full-time workers.
Relationship: The permanency of the relationship, whether benefits are provided, and what’s specified in written contracts all factor into worker classification.

If you’re still unsure, the IRS allows you to request a determination by filing Form SS-8.

In the US, worker classification laws also vary by state. For example, California uses the ABC test, which says a worker is considered an employee unless all three of the following apply:

(A) The worker is free from control and direction.
(B) The work performed is outside the usual course of the business.
(C) The worker is customarily engaged in an independently established trade.

Misclassifying workers can lead to audits, back taxes, penalties, and legal action. Understanding the difference is critical.

1. Contractors decide how, where, and when they work

By law, contractors set their own schedules and working hours. Full-time employees follow company-defined schedules, often with more supervision.

Companies can only define the outcome and deadlines for a contractor — not how the work is done. This gives contractors more autonomy and limits oversight from employers.

2. Contractors can cost less overall

Even though a contractor’s hourly or project rate may be higher, employers often save more in the long run. Why?

No equipment or workspace costs: Contractors pay for their own tools.
Pay-as-you-go: Contractors are typically paid per project or hour, without the overhead of full-time salaries.
No benefits: In the US, contractors don’t receive health insurance, time off, or retirement contributions.
No tax burden: Contractors pay their own taxes. Employers don’t need to calculate or remit payroll taxes.
No training costs: Contractors are hired for their existing skills and don’t require onboarding or upskilling.

Employee turnover is also expensive — costing, on average, about half to twice an employee’s salary. Replacing contractors is usually faster and cheaper.

3. Full-time employees need training and development

Full-time hires require more upfront investment — but they also offer more stability.

Training: Full-time employees need onboarding to learn your processes, tools, and culture.
Development: To retain great employees, you’ll need to invest in growth opportunities like promotions, raises, or upskilling.

Though this takes time and resources, it leads to stronger alignment and long-term performance.

4. Full-time employees can be more engaged

Because of their ongoing relationship with the company, full-time employees are typically more invested in its success.

Culture: Employees are immersed in your team — joining events, building relationships, and understanding your mission.
Loyalty: Contractors may work with competitors. Employees often sign exclusivity or non-compete agreements.
Engagement: Employees attend regular check-ins and are more involved in strategic decisions.
Work quality: Over time, employees receive feedback and grow with your business — often producing more consistent results.

When to hire contractors

In a nutshell, choose a contractor when the work is short-term, specialized, or sporadic and you don’t need day-to-day control over how it gets done.

Here are some examples:

Seasonal projects: Great for holidays or one-off surges in demand.
Specialized needs: Hire for unique skills like graphic design, construction, or bookkeeping.
Narrow-scope work: Clear deliverables like “10 blog posts per month” or “5 hours of bookkeeping” are ideal.

When to hire full-time employees

Opt for a full-time hire when the role is central to your business, requires ongoing collaboration, or handles sensitive, proprietary work you want to keep in-house.

Examples include:

Collaborative projects: Work that requires interdepartmental communication or long-term planning.
Long-term needs: If the responsibilities stretch over months or years, full-time makes more sense.
Frequent supervision: Roles that require oversight, real-time feedback, or high availability.
Client-facing roles: Customer support, sales, and account management often benefit from the consistency of full-time staff.

Next steps for hiring a hybrid workforce

In many cases, the best solution is a hybrid workforce — blending contractors and full-time employees.

The key is to classify each worker correctly. Misclassification can result in fines, audits, or worse. That’s where we come in.

Plane helps companies manage payroll, benefits, and compliance for global teams. Whether you’re hiring contractors, employees, or both, we make sure you’re meeting local laws and tax requirements.

Get started with Plane

Frequently asked questions

Contractors are self-employed and control how and when they work. Employees are hired directly by a company, which controls their work and typically provides benefits and tools.

How does the IRS determine contractor vs. employee status?

The IRS uses three factors: behavioral control, financial control, and the relationship between the parties. Learn more.

Do employers have to pay taxes for contractors?

No. Contractors are responsible for their own taxes. Employers don’t need to withhold or remit taxes for independent contractors. Please note that laws may vary depending on the contractor’s country.

What happens if I misclassify a worker?

Misclassification can result in penalties, back taxes, interest charges, and legal fees. It’s critical to classify correctly and consult experts when in doubt.

Can I convert a contractor to a full-time employee?

Yes. Many companies do this. But it’s important to update contracts, adjust benefits, and ensure tax compliance when making the switch.

Legal Disclaimer: The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.