Self-Employment versus Salaried Employment – What’s the Difference?

One of the best parts of life is the fact that it is full of endless possibilities. That means that a person has the option to choose a bunch of different ways to earn their income. Many people stick to traditional salaried employment while others try self-employment instead. Heck, you could even do both if you really wanted! If you are curious as to which path may be a good fit for you then keep reading! We will go over the difference between salaried employment and being self-employed so that you can get a little more insight into these two opportunities.

What is a Salaried Employee?

Some people think of a salaried employee as any employee that works and gets paid by an employer. However, while that’s kind of true, it doesn’t take into account the whole picture. By definition, a salaried employee is an individual that receives a set amount of pay (salary) regardless of how much they work every week. This is different from an hourly employee who is paid at an hourly rate and whose work hours directly translate to how much they are paid.

This means that a salaried employee will receive a salary pay based on a 40 hour work week, even if they don’t work that much. It’s also important to note that if the employee works over 40 hours a week they may not get overtime but that depends on the employer.

Do Salaried Employees Have to Clock In?

When you think of an hourly employee, they have to monitor the times that they work since it directly impacts the amount that they will get paid. However, salary employees are a bit different. Salaried employees have no legal obligation to clock in so many employers don’t require it. There are also no requirements for these types of employees to clock in because oftentimes salary employment requires an individual to work irregular hours throughout the week.

Can a Salaried Employee Refuse to Work Overtime?

An individual has the right to refuse overtime work. However, this refusal may break conditions set by a contract. This means if you need to work 60 hours in a week, it is still fully legal to have you do so.

Benefits of Being a Salaried Employee

Salaried employment is attractive to people for a bunch of reasons (sometimes even self-employed individuals want to become a salaried employee). There are a bunch of benefits that come with this form of employment but a couple are:

  • Easier to Budget
  • Stability

Easier to Budget

It is easier to budget as a salaried employee because you know for sure what your income will be for the month. Regardless of when you get paid (whether weekly, bi-weekly, or monthly) you know how much you will get. Even if you make more for that month for whatever reason, you can anticipate the minimum. When you know exactly how much money you will get a month, you can plan your budget easier.

Stability

Another attractive component of salaried employment is the fact that people can enjoy the comfort of a stable source of income. Salaried employees basically know a year in advance how much money they can expect to make. This stability can provide peace of mind when dealing with your financial situation.

Drawbacks of Being a Salaried Employee

Unfortunately, even though there are some nice perks that come along with being a salaried employee, there are also drawbacks:

  • Work Hours
  • Lack of Overtime Pay

Work Hours

Salaried employees can expect to work over 40 hours a week. Hours vary by employer but some salaried individuals find themselves working 60 or more hours a week even if their salary is based on a 40 hour work week.

Lack of Overtime Pay

Salaried employees can expect to make the same amount of money regardless of whether or not they worked 40 hours. This includes whether they work less than 40 hours or more than 40 hours. Traditionally, hourly employees will receive overtime pay but that may not be the case with salaried employees. Instead, even if a person works overtime, they will likely not see that pay translated into their bank account (but it depends on the employer).

Understanding Being a Self-Employed Person

Now that you have a better understanding of salaried employees, you should get a better understanding of self-employed individuals as well. Self-employed individuals earn income by working for themselves. Unlike employees of someone else, they are technically their own employer. There are plenty of definitions of self-employment but one of the most important definitions lies with the Internal Revenue Service (IRS). The IRS defines someone as a self-employed person if any of the following conditions are applicable to them:

  • An individual carries on a business or trade as an independent contractor
  • An individual carries on a business or trade as a sole proprietor
  • A person is a member in a partnership that carries on a business or trade
  • A person is otherwise in business for themselves (this includes part-time business)

Understanding Independent Contractors

Understanding who is considered a self-employed person can be confusing. Referring back to the IRS definition, it is important that you understand what an independent contractor is. Independent contractors are defined as a person/entity who is contracted to perform a service for another entity as a non-employee.

Independent contractors can take on a variety of job positions. A tip that you can use to see if you are able to turn your passion into independent contractor work is to do an online search. You can search for independent contractors in your area to see the different types of services they offer. This will not only show you competition in your area but also show you different types of jobs that fall under this category near you.

What is a Sole Proprietor? 

It is also important to know what a sole proprietor is when understanding this employment opportunity. The IRS defines a sole proprietor as a person who owns an unincorporated business by themselves. That is why they are considered self-employed.

Benefits of Being Self-Employed

Just as we discussed some benefits of being salaried employees, there are also benefits for self-employed individuals. Some of these benefits include:

  • Work Hour Flexibility
  • Control of Work Environment

Work Hour Flexibility

One of the benefits of this employment option is the fact that you can enjoy work hour flexibility. Let’s look at an example! Let’s say you are an artist that paints mugs. If you have an order for a mug due in 3 weeks but it only takes 5 hours to make a mug, then you can decide when you want to work those hours.

Control of Work Environment

Another benefit of being self-employed is that people like the fact that they have more control over a bunch of aspects of the business. One of the biggest aspects that you can control is the work environment. For example, instead of having to wear business casual clothing, you can decide that wearing any fit is acceptable. This control means you can maintain an environment that you love to work in!

Drawbacks of Being Self-Employed

Sadly, you can also expect some drawbacks that come along with being a self-employed person. Some of the biggest drawbacks include:

  • Lack of Stability
  • More Stress

Lack of Stability

When you are self-employed, you may have to deal with a lack of stability when it comes to the amount of money you make. For example, if you are an independent contractor that fixes bathrooms, but no one is hiring you, you have no opportunity to work . Without work, you are unable to make money. This doesn’t happen in jobs where you are guaranteed income like in hourly or salary positions!

More Stress

As a self-employed person, you can expect to deal with more stress. That is because you are solely responsible for the creation of your self-employment setup. You need to handle all aspects from the taxes, to the legal documents, and more. Dealing with these aspects can result in a lot more stress.

Self-Employment Versus Salaried Employment

Now that you have a better understanding about these two employment opportunities, you can begin directly comparing the differences. Some of the biggest differences include:

  • Health Insurance
  • Unemployment Benefits
  • Taxes

Health Insurance

A big difference between salaried employment and self-employment is health insurance. Salaried employees can usually expect to be able to get health insurance through their job. Generally employers include employee benefits like offering health insurance at a more affordable rate compared to the marketplace. On the other hand, if you are self-employed, you have to look for health insurance through the marketplace. Instead of having your employer provide an option for you to consider, you have to find health insurance on your own.

Even though you have to find health insurance on your own, you may be able to include these costs as tax deductions. You can expect to be able to deduct the cost of health insurance for not only yourself, but for your spouse and dependents as well when tax time comes around.

Unemployment Benefits

If you are a self-employed individual like an independent contractor, you can generally expect to not be eligible for employee benefits like unemployment insurance. That is because you are self-employed and not considered an employee at a company.

Since a salaried employee is a part of a business and works as an actual employee, they can usually expect to be eligible to receive these types of employee benefits. Unemployment insurance is important in securing your situation if you lose your job due to no fault of your own.

Taxes

This is going to be one of the biggest differences when it comes to these employment opportunities. The taxes that you deal with as a salaried employee compared to being self-employed are more different than a lot of people realize.

Self-employed individuals are responsible for paying their own taxes. The self-employment tax rate is 15.3% and is the sum of two different tax rates (Social Security taxes and Medicare taxes). The rate is 12.4% for Social Security taxes and 2.9% for Medicare taxes. It is important to note that the self-employment tax rate is only applicable to net-earnings from your self-employment, not just overall income. Self-employment tax also has other rules and guidelines that impact how much you will need to pay.

On the other hand, if you are a salaried employee, you can expect your tax rate to be similar to self-employment tax but a little different. Instead of being responsible for the entire rate of 15.3%, your employer will split this with you. That means the rate that you are responsible for is 7.65% while your employer will cover the other 7.65% (totalling 15.3%).

Commonly Asked Questions

Understanding the difference between salaried employees and self-employed individuals can be a daunting task. Luckily, it doesn’t have to be! There are a bunch of questions that other people have had when understanding this difference that you may have as well.

What Qualifies as Self-Employment Income?

Let’s refer back to the definition that the IRS has for self-employment. If you keep that in mind, that means that any income earned from carrying on a business as either a sole proprietor, independent contractor, or member in a partnership is considered self-employment income. In fact, the trade or business activity doesn’t even necessarily need to be profitable and it doesn’t matter if you don’t work full time. All that matters is your motive and if it’s profit, then you are considered self-employed.

Do You Qualify as a Self-Employed Person?

There are plenty of examples of what it means to be self-employed! Those who are independent contractors or sole proprietors are prime examples of who is considered self-employed.

Examples of Self-Employed Individuals

  • Food Truck Workers
  • Freelance Writers
  • Local Handymen
  • Independent Business Consultants

These are just four examples amongst many! If you want to review a specific job title then you can do additional research online.

Is Being Self-Employed Better Than Salaried Employment?

The answer to this question depends on your personal situation. There are many factors that can determine what would be the right choice for you. One of the best ways to determine what the best employment opportunity would be is to look at your goals and compare the pros and cons of each option!

Overall

There are plenty of options when it comes to finding an employment opportunity that works for you. There are two popular options that people pursue which are self-employment and salaried employment. These options both have their own sets of pros and cons. Salaried employment has the perks of a stable source of income and the ability to budget easier. However, these perks may not outweigh the fact that salaried employees can miss out on overtime pay and have long work hours.

On the other hand, self-employed individuals have the benefits of work hour flexibility and more control of their work environment. However, they have the drawbacks like the fact that there is a lack of income stability, and more stress. Either way, these employment opportunities have key differences in terms of:

  • Healthcare
  • Unemployment Benefits
  • Taxes

After doing research on both of these employment opportunities, you should find out which one would be best for your lifestyle and goals. Take your time, continue to research, and with proper education you can make a decision that is customized to your needs!

Article References

https://www.bamboohr.com/hr-glossary/salaried-employee/

https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#SelfEmployed

https://www.investopedia.com/terms/i/independent-contractor.asp

https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships

https://www.thebalancecareers.com/differences-between-employed-vs-self-employed-2062139

https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

Previous articleThe Complete Guide to Self Employment for Retirees
Next articleCan Payday Loans Help You Between Paychecks?