When you think of work you probably think of being an employee. An employee is a different type of worker than an independent contractor which most people don’t realize. However, it is actually important to know the difference between these two types of workers. That’s because each option has its own set of pros, cons, and things to keep in mind. The option you choose could make a world of difference when it comes to your lifestyle and even your budget!
What is an Employee?
The United States Department of Health and Human Services (HHS) outlines a clear definition on what it means to have an employee status. According to the HHS an employee can be defined through:
Employees are protected through a variety of state and federal labor laws and employment laws.
During the hiring process, employee applicants will complete an application through Human Resources. Once approved, the applicant will receive a job offer. If the person chooses to accept the offer then they will need to finalize the hiring process to officially become an employee.
Employees get a W-2
Employees will either earn an hourly wage or a salary
There are plenty of pros and cons that come along with this type of worker. Some of the pros include:
- Job Security: People can expect to have steady employment as long as the company grows and they follow the terms of their employment.
- Employee Benefits: You may be offered benefits from your employer like, paid time off, health insurance, etc.
While there are some benefits that come along with employment, there are still some drawbacks to keep in mind. This includes:
- Lack of Freedom: Employees will likely have to follow work schedules and other work settings that the manager sets.
- Limitations: There may also be limits on how much overtime you can work as an employee which limits how many hours you work which could impact the overall amount you make.
What is an Independent Contractor?
Now that you have a better understanding of what an employee is, you will need to learn about what it means to be an independent contractor. An independent contractor is self-employed. That means that they are a person that reports self-employment income. When a person is self-employed they will either be a contractor or a sole proprietor. According to the HHS an independent contractor can be defined through:
Generally, Contractors are not protected by any state or federal labor laws or employment laws.
An independent contractor will enter an agreement/contract like a Statement of Work with a business department or person that needs help completing a task, receiving a service, etc. There may be times where the contractor completes a proposal as well.
Contractors use a 1099
The contract will specify the payment method so it may be for a total amount, weekly amount, daily amount, or an hourly amount.
Just like an employee, contractors have pros and cons that they deal with. Some of the pros include:
- More Freedom: An independent contractor has the choice to determine their own schedule, how they will work, and other terms of their employment. Since they are hired by clients, clients will need to stay in the limitations set by the contractor. This can also make it easier for contractors to find a work life balance!
- Potentially Higher Pay: Oftentimes, the pay for an independent contractor will be higher than that of an employee. That’s because companies do not need to pay typical expenses like health insurance coverage, unemployment compensation, etc.
While there are some nice pros that come along with being this type of worker. There are some cons to keep in mind like:
- Tax Responsibilities: An independent contractor can expect to deal with more taxes since they are self-employed. That’s because they are responsible for withholding their own local, state, and federal taxes. They also need to submit quarterly estimated taxes to the Internal Revenue Service (IRS). Not following tax rules can lead to some hefty penalties!
- Lack of Support: Oftentimes a contractor will not qualify to receive unemployment assistance since they are self-employed. That means that they will also have no support when it comes to funding their retirement account. On top of that, they will need to deal with the business expenses, out of pocket expenses, and more on their own.
What’s the Difference Between an Independent Contractor and an Employee?
Even though an employee and an independent contractor may do similar tasks, they are actually a different type of worker. One of the biggest differences is the fact that for an employee, they don’t need to worry about withholding tax. Instead, the company that hires them will withhold those items on their behalf from wages paid. On the other hand, for an independent contractor, the client that hires them will not withhold any taxes on their behalf.
It is also important to keep in mind that even though typically there is a lack of support for an independent contractor, each state will have their own set of laws. That means there still may be opportunities for support depending on the state!
Why Do Companies Hire Contractors Instead of Employees?
When a company chooses to hire an employee it comes along with some aspects like how employees:
- Can be a source of continuous service
- Can provide support and dependable service
- Have the chance to buy into your company
However, contractors provide other aspects that companies may find better like:
- Staffing flexibility
- Providing a higher level of expertise
- Less paperwork
Each company has their own goals in mind when deciding which type of worker they want to work with. That means it will vary, and some companies even choose to hire both types of workers to help them accomplish different goals at the same time!
You May be Thinking, “Should I be a Contractor or Employee?”
The answer to this question will depend on different factors. For example, if you are someone that wants to work under a boss and likes that structure, then being an independent contractor may not be the best fit. That’s because when you become an independent contractor, you are your own boss! Some people love this while others are not so happy about it. You will want to get a clear picture of the goals that you have for your career, your lifestyle, and your budget. Having that picture painted in your mind clearly can mean that you are able to review these two options better to find one that can help you meet your goals.
Does an Independent Contractor Have Their Own Business?
When people think about an independent contractor, they may think that is someone that has their own business. However, that’s not necessarily the case every time! Instead, contractors may have a registered legal business name but it isn’t a guarantee.
Understanding the Employment Taxes You Will Deal With
Like we said earlier, one of the biggest differences is how you will handle taxes. That is why we want to highlight that difference again to make sure we make it clear on what that means! When you are an independent contractor, you will be responsible for all of your taxes. That means eligible taxpayers that are contractors will need to pay 100% of their Social Security taxes and Medicare taxes. On the other hand, employees get to split these taxes with their employer at a 50/50 split!
When reviewing different work opportunities, you may come across the fact that there are different types of workers. Two types of workers are employees and contractors. Understanding the difference between these two options can help you decide which would be the best for your lifestyle and goals! So keep in mind that, employees can be defined through:
- Employment Laws: Employees are protected through a variety of state and federal labor laws and employment laws.
- Hiring Practices: During the hiring process, employee applicants will complete an application through Human Resources. Once approved, the applicant will receive a job offer. If the person chooses to accept the offer then they will need to finalize the hiring process to officially become an employee.
- Tax Documents: Employees get a W-2
- Payment Method: Employees will either earn an hourly wage or a salary
It can be easy to compare because an independent contractor can be defined through the same categories:
- Employment Laws: Contractors are not protected by any state or federal labor laws and employment laws.
- Hiring Practices: An independent contractor will enter an agreement/contract like a Statement of Work with a business department or person that needs help completing a task, receiving a service, etc. There may be times where the independent contractor completes a proposal as well.
- Tax Documents: Contractors use a 1099
- Payment Method: The contract will specify the payment method so it may be for a total amount, weekly amount, daily amount, or an hourly amount.
Take your time reviewing the differences and you may find that you have a better path than what you originally thought!