Can I choose to treat a worker as a contractor to save on costs?

No. Employee status is decided by the facts of the relationship, not by choice or by what the contract says. If you control how and when the work is done and the person depends on you for regular pay, they are an employee, and treating them as a contractor risks back taxes and penalties.

What benefits is an employee legally entitled to?

It depends on the country, but employees generally receive statutory protections that contractors do not: minimum wage, limits on working hours, paid annual leave, sick pay and, in most places, notice and protection from unfair dismissal. Employers also pay social contributions on top of the employee's wages.

Who pays an employee's taxes?

The employer operates payroll on the employee's behalf. It withholds income tax and the employee's share of social contributions from gross pay, adds the employer's own contributions, and remits everything to the tax authority. The employee receives net pay and a payslip showing the deductions.

Can I employ someone in another country directly?

You can, but you usually need a registered legal entity there first, which takes time and ongoing compliance. An employer of record is the common alternative: it employs the person locally on your behalf, so you gain a compliant employee abroad without setting up your own entity.

Glossary

Employee

An employee is a worker whose relationship with a business is governed by employment law, giving the business the right to direct both what work is done and how it is done, and obliging it to withhold taxes, pay statutory benefits and follow labour protections.

Reviewed by Teamed's in-house employment-law team·Last updated 28 July 2026

Also known as: common-law employee

What is Employee?

An employee is a worker the law treats as part of a business rather than as a separate business in their own right. The defining feature is control: the employer has the right to direct not only what the worker produces but how, when and where they do it. In return, the worker gains legal protections.

Being an employee brings obligations for the employer. It must withhold income tax and the worker's share of social contributions, pay employer contributions on top of wages, and provide statutory entitlements such as minimum wage, paid leave and, in most countries, protection from unfair dismissal. These duties attach to the employment relationship, not to the job title.

Whether someone is an employee is a legal test, not a matter of preference. In the United States, the IRS applies a common-law control test; other countries use their own. Labelling a worker a contractor does not change their status if the relationship is, in substance, employment.

What makes a worker an employee rather than a contractor?

The central test is control. If the business decides how, when and where the work is done, provides the tools, integrates the person into its operations and pays a regular wage, the worker is likely an employee. A contractor, by contrast, controls their own methods and works for their own account.

What is an employer legally responsible for?

An employer must run payroll correctly: withholding income tax and the employee's social contributions, paying employer contributions, and remitting both to the authorities. It must also meet statutory obligations, which typically include minimum wage, working-time limits, paid leave, sick pay and notice on termination. The exact duties vary by country.

How does hiring an employee abroad work without a local entity?

To employ someone in a country where you have no legal entity, you can use an employer of record. The EOR becomes the legal employer on paper, running compliant payroll, tax and benefits, while you keep day-to-day direction of the person's work. This lets you hire employees abroad without registering a company first.

Key facts

US employee classification standard: The IRS uses a common-law control test across three categories: behavioural control, financial control and the type of relationshipNo single factor is decisive; the IRS weighs the whole relationship to decide whether a worker is an employee for federal tax purposes.Source: Internal Revenue Service· verified 2026-07-28
US employer payroll tax: Employers withhold and match FICA of 7.65% (6.2% Social Security plus 1.45% Medicare)The 6.2% Social Security portion applies up to the annual wage base, set at $184,500 for 2026. This employer match is a cost that does not arise with a genuine independent contractor.Source: Internal Revenue Service· verified 2026-07-28

Frequently asked questions

Can I choose to treat a worker as a contractor to save on costs?
No. Employee status is decided by the facts of the relationship, not by choice or by what the contract says. If you control how and when the work is done and the person depends on you for regular pay, they are an employee, and treating them as a contractor risks back taxes and penalties.
What benefits is an employee legally entitled to?
It depends on the country, but employees generally receive statutory protections that contractors do not: minimum wage, limits on working hours, paid annual leave, sick pay and, in most places, notice and protection from unfair dismissal. Employers also pay social contributions on top of the employee's wages.
Who pays an employee's taxes?
The employer operates payroll on the employee's behalf. It withholds income tax and the employee's share of social contributions from gross pay, adds the employer's own contributions, and remits everything to the tax authority. The employee receives net pay and a payslip showing the deductions.
Can I employ someone in another country directly?
You can, but you usually need a registered legal entity there first, which takes time and ongoing compliance. An employer of record is the common alternative: it employs the person locally on your behalf, so you gain a compliant employee abroad without setting up your own entity.

Related terms

Note

This is general information, not legal advice. Statutory rules vary by country and change over time.

Glossary

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Last verified 2026-07-28