At some point in their careers, everyone asks themselves…should I be a contractor or employee? And as you explore each option, you’ll discover that both have their pros and cons.
When you think of the traditional workplace, you probably think of being an employee. This is regarded as the safe, steady approach to working. However, an independent contractor has its benefits too – like more flexibility and a higher earning potential.
So – which of these two types of workers should you be? To answer that question, we’ll have to take a look at both options in-depth and weigh the pros and cons of each. The option you choose will make a world of difference when it comes to your lifestyle and your income!
Without any further ado, here are the key differences between employees and independent contractors.
First, What are the Differences Between Contractors and Employees?
Before we address the question you came here with of whether you should be a contractor or an employee, we need to break down the key differences between each type of worker. Our article on the pros and cons of 1099 vs w2 workers does a great job of this. However, we’ll summarize what you need to know below – starting with a brief overview of traditional employment.
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:
- 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
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:
- Employment Laws: Generally, Contractors are not protected by any state or federal labor laws or 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 contractor completes a proposal as well.
- Tax Documents: Contractors use a 1099 (Read our article on what qualifies as a 1099 employee for more information)
- Payment Method: The contract will specify the payment method so it may be for a total amount, weekly amount, daily amount, or hourly amount.
Should I Be a Contractor or Employee? Weighing the Pros and Cons of Each Employment Method
So – knowing the differences between each employment method, should I be a contractor or employee? After reading the differences above maybe you can already identify the pros and cons of each. If not, keep reading below – we’ll make it obvious:
Pros and Cons of Employees
To kick things off, we’ll explain the good, the bad, and the ugly of being an employee and working in a traditional work environment.
- 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.
- 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.
Pros and Cons of Independent Contractors
Just like an employee, contractors have pros and cons that they deal with.
- 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.
- 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 taxes. They also need to submit quarterly estimated taxes to the Internal Revenue Service (IRS). Not following tax rules can lead to hefty penalties! Learn more about why self employment taxes are higher in our blog. OR, explore how much self employment income is taxable.
- 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.
Factor in Taxes, Too!
As 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!
So – Should I Be a Contractor or Employee? The Verdict:
So, knowing the pros and cons of each, 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.
Should I be an Employee or Contractor? Wrapping Things Up
We hope this resource clears up your question as to whether you should be an employee or independent contractor. Starting your own business – even just as a freelancer or independent contractor – can be very rewarding. But, it comes with its own drawbacks – just like traditional employment. From filing your own taxes to getting your own health insurance – you’ll have to work harder to stay compliant.
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:
Take your time reviewing the differences and you may find that you have a better path than what you originally thought!