Chances are, if you’re an employee, you may become a contractor in the next few years, or have the opportunity to be one. And, whether that means going into an office to get work done or working remotely, there are some benefits of being a contractor — as more and more people are finding out.
Approximately 20 percent of American workers are now contractors, according to an NPR/Marist poll. That number is expected to double by 2020, with most Americans working as contractors within a decade. As you navigate the gig economy in your future, it’s important to know the pros and cons of being an employee or an independent contractor.
An independent contractor works for a business, but has much more freedom as to how to perform the work. A contractor, for example, can work the hours she wants, as long as she gets the job done. She can work from home or a personal office, use the tools she wants to do the work and use her own expertise to meet her goals.
The general definition of an employee is a worker who works full-time (or close to it) for only one company. The company can dictate how you perform your job and is required to meet state and federal guidelines regarding your pay, benefits, working conditions, taxes and other work conditions.
Some employers try to save money on labor by hiring independent contractors, but then put strict rules on them. This lets them get workers who are just like employees, but who don’t cost the company as much or require the company to follow as many regulations.
For this reason, the Internal Revenue Service has set certain guidelines that define what an employee is. If a company asks a worker (even one who freely agrees to work as an independent contractor) to do any of the following, the worker can get classified as an employee:
- The worker performs his job at the company’s workplace.
- The worker uses the company’s equipment.
- The worker must perform the work exactly how the company tells him to.
- The worker receives training from the company in how to do the job.
- The worker must work set hours.
- The worker must wear a uniform.
- The worker must work exclusively for the employer.
The list is longer and courts take into account a variety of factors if a worker or government agency sues a company for violating employee rights, but this list provides the main factors courts consider.
Employee Pros And Cons
- An employer provides your equipment.
- An employer provides your workplace.
- An employer pays half of your FICA (Social Security and Medicare) tax.
- An employer deducts your taxes from your paycheck, and you pay your income taxes once each year (due on April 15th).
- An employer may provide benefits, such as health insurance.
- Employers must pay your workers’ compensation coverage (except in Texas)
- You might qualify to receive unemployment insurance.
- You are protected by more state laws.
- Your employer sets your hours, place of work and dress code.
- You have less freedom in how you perform your work.
- You must follow company policies.
- You might not be able to moonlight to earn extra money.
- You are often restricted from working for anyone else.
Independent Contractor Pros and Cons
- You work the hours you want, and from your preferred location.
- You set your own rates.
- You decide how you will perform the work to meet your client’s goal.
- You choose what equipment you will use.
- You can work for multiple clients.
- You must pay for your own workspace and equipment.
- You must find your own clients.
- You must run the business (marketing, office tasks, taxes, legal issues).
- You pay all of your FICA tax. This means 15.3 percent on the first $128,400 of your net income, as opposed to 6.2 percent as an employee.
- You must pay quarterly taxes, not every April 15th.
- You do not get any benefits.
- It’s easier for a client to fire you at any time, with no severance.
- You do not qualify for unemployment insurance.
- You do not qualify for workers’ compensation insurance.
Independent Contractor Myths
It’s a myth that you gets lots of great “write offs” when you’re an independent contractor or own your own business.
For example, you can’t write off your meals or entertainment unless you are traveling on business. If you pick up the lunch when you’re with a client locally, you can only write off the client’s portion of the meal.
You can write off a home office if it’s the primary place you work (not a satellite office you sometimes use), and the room can’t be used for other activities (nursery, workout room, etc.).
You can only write off auto mileage when it’s directly related to your car. Your mileage deduction covers your gas, oil, repairs and general maintenance, so you can’t write those expenses off.
You can’t write off a vacation just because you did some business on the trip. The primary purpose of your visit must be business, and you can’t write off rooms, meals or other expenses on the days you didn’t work.
The Bottom Line?
Whether or not being an independent contractor is the right move for you generally boils down to two considerations: security and independence.
Run some numbers to see if you can make the same or more money as an independent contractor after you factor in payroll taxes, insurance, benefits, equipment, office space, marketing, legal expense, business license and other costs.
For example, if you do IT work for an employer and you make $30 an hour, you might be able to bill $90 an hour as a contractor. Before you eyes get too big, remember the investment in equipment, software, marketing, insurance and other expenses you’ll have as a contractor. Then ask yourself whether you believe you’ll be able to bill enough hours to cover them.
If you find you can bring in more money as an independent contractor, then look at the lifestyle. You’ll not only have more creativity and independence, you may also have more stress.
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