What is a contractor?

A contractor is a person or business engaged directly by a company while having no employment relationship with that company.

Because a contractor is not an employee, they are not afforded certain rights and obligations. The employer of a contractor is also relieved of some duties and responsibilities that it would have if the contractor were an employee.

Understanding contractors—from their legal status to how they fit into your workforce strategy—is essential for modern businesses, especially since 42% of U.S. executives plan on hiring more independent workers. This guide covers the types of contractors you might work with, key differences from employees, and how to build successful contractor relationships while staying compliant.

Disclaimer: This article and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.

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Types of contractors

So, what exactly is a contractor? A contractor is a self-employed professional who provides services to businesses without being their employee. They work independently, manage their own taxes and expenses, and typically focus on specific projects or specialized tasks.

You'll encounter several types of contractors in business:

• Independent contractors: Self-employed individuals who provide services to a business on a project or ongoing basis. They operate under their own business name and are not on the company's payroll.

• Freelancers: Similar to independent contractors, freelancers typically work on a project-by-project basis for multiple clients. This term is common in creative and technical fields like writing, design, and software development.

• Consultants: Experts who provide professional advice or services in a specific field. They are engaged for their specialized knowledge to help a company solve a particular problem or achieve a goal.

Contractor vs. employee: Key differences

Here's the million-dollar question: contractor or employee? Understanding this difference is critical for compliance, as misclassification can lead to significant penalties. The IRS states that worker classification depends on the specific relationship and highlights three categories to consider: behavioral control, financial control, and the relationship of the parties.

• Control: A company has significant control over an employee's work, including when, where, and how they do it. A contractor, on the other hand, retains control over their own work process.

• Financials: Employees are paid a regular wage or salary and have taxes withheld by the employer. Contractors are typically paid a flat fee or hourly rate per project and are responsible for managing their own taxes and business expenses.

• Relationship: The relationship with an employee is intended to be ongoing, and they often receive benefits like health insurance and paid time off. A contractor relationship is usually for a specific project or period, with a clear contract outlining the terms and no expectation of employee benefits.

What contractors are responsible for

A key feature of being a contractor is autonomy. This independence comes with a unique set of responsibilities that differ from those of a traditional employee.

Contractors are essentially running their own business. Here's what that means:

• Tax responsibilities: They pay their own income taxes, social security, and Medicare taxes

• Business expenses: They cover equipment, software, and insurance costs

• No employee benefits: They don't receive paid vacation and are much less likely to have employer-provided health insurance, with data showing only 19.9% of contingent workers receive it from their client companies compared to 51.2% of noncontingent workers.

What qualities to look for in a contractor

When you engage a contractor, you're bringing in a specialist to achieve a specific outcome. To ensure a successful partnership, look for professionals who demonstrate:

• Expertise: They should have a proven track record and deep knowledge in their field.

• Self-discipline: Great contractors manage their own time effectively and meet deadlines without constant supervision.

• Clear communication: They should be proactive in providing updates and clarifying expectations.

• Professionalism: This includes reliability, respecting agreements, and delivering high-quality work.

Working with contractors effectively

Want to build strong contractor relationships? It starts with setting clear expectations from day one.

Always use a detailed contract that outlines the scope of work, deliverables, timelines, and payment terms. This protects both you and the contractor.

Treat them as valued partners, respecting their expertise and autonomy. Given that independent contractors overwhelmingly preferred their work arrangement in a 2023 survey, honoring their independence is key to a successful relationship. Regular check-ins help keep everyone aligned without crossing into employee-like control territory.

Simplifying contractor management globally

Engaging contractors allows your business to access specialized talent and scale with flexibility. But managing contracts, payments, and compliance across different countries can quickly become complex. A global employment platform removes that friction.

Oyster helps you create locally compliant contracts, pay contractors on time in their preferred currency, and manage everything from a single dashboard. It's a simpler, more secure way to build and manage your global team. Ready to see how it works? Start hiring globally.

FAQ

What does it mean to work as a contractor?

Working as a contractor means you're self-employed and provide services to clients on a contractual basis. You handle your own taxes, insurance, and business expenses.

Who is typically called a contractor?

A contractor is a self-employed individual hired for specific jobs or services. Think freelance writers, IT consultants, or marketing specialists.

What does a contractor do day-to-day?

Contractors focus on completing work outlined in their contract while managing their own schedule and tools. They operate independently without direct daily supervision from clients.