What Is a Contract Employee?
By Indeed Editorial Team
Updated September 12, 2022
Published July 26, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When looking for jobs, you may notice companies differentiating between a contract employee and an internal employee position. The specifics of the role, such as its benefits package or work hours, determine whether it's contractual or internal. While the two are similar, there are several differences you need to understand to find a role that suits your needs. In this article, we discuss what a contract employee is, explain how it's different from an internal employee, and explore the benefits and disadvantages of being a contract employee.
What is a contract employee?
Contract employees, also known as independent contractors, contract workers or freelancers, are self-employed workers. Companies hire contract employees for a specific project or certain timeframe for a set fee. Contract employees can use their expertise in a particular area to work for multiple companies at once. The terms of a contract employee's work are in their employment contract. It typically includes information about their responsibilities, payment, confidentiality agreement, and term of employment.
What is the difference between a contract employee and an internal employee?
To help you understand the difference between a contract employee and an internal employee, look at how they compare in the following areas:
Income tax: If you're an internal employee, your employer automatically takes a portion of your income to put towards income taxes. Near the end of the year, they send you a T4 slip, which summarizes your earnings and deductions to help you file your taxes.
Employment Insurance (EI) premiums: Employers also deduct a portion of your income to put towards EI. Then, they contribute 1.4 times that amount as well. This allows you to apply for temporary income support if you're unemployed or need to take time off.
Canada Pension Plan (CPP) contributions: The last deduction employers take is to put towards your retirement fund. You can typically access this fund at 65 years old. Like with EI, employers contribute to your CPP as well.
Training: You typically receive on-the-job training from your manager or coworkers.
Work hours: Employers make your schedule. Depending on your role, it may be a set schedule or it may fluctuate.
Pay: You receive pay on a set schedule, such as bi-weekly or monthly.
Travel: If your employer wants you to travel for work, they typically pay for your expenses or provide transport.
Benefits: You are eligible for benefits, such as health insurance and life insurance as an internal employee.
Time off: You can request time off and use your vacation days to cover your absence.
Income tax: If you're a contract employee, you won't receive a T4 from the companies you work for. So, you must keep track of your earnings yourself to file taxes at the end of the year.
EI premiums: You don't have to pay EI premiums unless you want to. There is an EI benefit for self-employed people that you can pay into when you file taxes. You'll pay the same amount as employees but won't have to pay the employer's portion.
Canada Pension Plan (CPP) contributions: If you make over $3,500, you must contribute to the CPP. The companies you work for don't have to contribute to your CPP, so you need to pay twice the annual percentage to cover the employer contribution.
Training: You should be an expert in your field already, so employers won't need to train you. However, they may brief you on the specifics of the project you're working on.
Work hours: You can typically choose the days and hours you work or negotiate your schedule with clients before you sign a contract.
Pay: Since you're working short term with a client or company, you'll likely receive your pay at the end of your contract. You can negotiate a different payment schedule, such as half the amount up front or a portion after every milestone you complete.
Travel: You may have to pay for any travel you need to do while working.
Benefits: Clients won't provide benefits, so you may need to consider private insurance plans.
Time off: You won't receive paid time off.
Benefits of being a contract employee
To determine if being a contract employee is the best option for you, here are some benefits for you to consider:
As you'll be working with clients temporarily, you don't have to commit to a long-term working relationship with them. Some clients may be happy to hire you again, but many only need contract employees for a one-time project. This allows you to expand your network and meet plenty of new clients. It's also beneficial as you don't need to commit to clients long-term as you would with a regular employer.
More control of your schedule
As a contract employee, you control your schedule. You may need to meet with clients occasionally, but you don't need to stick to traditional working hours. This makes taking time off much easier as well, since you don't need to request it from anyone or limit yourself to two weeks paid vacation a year.
Freedom to create what you want
As a contract employee, you have more creative freedom. Clients hire you for your skills, knowledge and creativity, so they trust you to create excellent and unique work. They may give you certain limitations or instructions, but you have much more creative freedom than internal employees.
Choose your fees
When negotiating a contract with new clients, you get to set your fee. Companies are often willing to pay more to contract employees as they don't have to pay for benefits or contributions to EI and CPP. You also don't need to wait for certain milestones, such as one year with a company, to seek a promotion. You control your fees, so you can raise them whenever you see fit.
Disadvantages of being a contract employee
While there are plenty of great reasons to be a contract employee, understanding the various disadvantages can help you make an informed decision:
As your contracts are temporary, you don't have the same security that internal employees do. There may be periods where you're without work and income, so you should ensure you have savings to make up for these times. However, once you have a steady client base, you have less trouble finding consistent work.
Employers give internal employees paid vacation time and benefits packages and contribute to their CPP and EI. As a contract employee, you need to pay for these benefits yourself. Shop around for the best health, dental or life insurance and pay for it monthly or yearly. You can then deduct these premiums as expenses on your taxes.
More tax responsibility
As clients won't be deducting income tax on your pay, you need to keep track of your income and expenses throughout the year. This can make filing taxes more complicated, but not impossible. Many accountants specialize in taxes for contract employees as well, so that's a great option.
How can I become a contract employee?
The path to becoming a contractor employee is similar to becoming an internal employee. For example, if you need a computer science degree to be an internal web developer, you need one to be a contract employee. Starting as an internal employee first gives you experience, helps you become an expert in your field, and allows you to build a portfolio to show prospective clients.
You then need to choose from the following three forms of business and seek clients:
Sole proprietorship: You don't need to register a business, as you're operating under your own name. Every year, you track your income and expenses and file taxes.
Partnership: Similar to a sole proprietorship but you partner with someone else, sharing the income and liability.
Corporation: This involves registering your business and separating yourself from it legally, so you won't be held liable.
Common positions for contract employees
Most industries have contract positions, so you won't be at a loss for options if you decide being self-employed is the best option for you. Here are some of the common positions you can consider:
Social media manager
Data entry clerk
Customer service representative
Video game designer
Please note that none of the institutions or organizations mentioned in this article are affiliated with Indeed.
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