While both employees and contractors do work for a business.  It's important to understand the difference between the two.  Employees fill out a W2 tax statement when they are hired.  When this is done, the employer has a responsibility to withhold certain taxes such as Income tax, Social Security, and Medicare.  They are also entitled to receive certain benefits.  An example of this is 1.5 times their pay for each hour worked over 40 hours in a week.  Also employers must pay the employer's portion of social security for all their employees.

Contractors also do work for the company but are not directly tied to the company. Employers should provide them with a 1099 tax document.  This is basically used to show that the employers had an expense and that the contractor made income for that year.  Contractors withhold their own taxes and generally set up an agreement with the business.  Contractors don't receive the same benefits as employees such as overtime pay or have employers paying half of their social security tax.  This doesn't mean they will be cheaper as typically contractors charge more for their services.

Some other differences between employees and contractors is that contractors typically provide their own work space, tools, and usually have a specialty skill. A contractor may work for multiple businesses at the same time.  The relationship that exists is based on the agreement between the business and the contractor.

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