Contractor vs. Employee: Understanding the Differences
The modern work era affords job seekers multiple opportunities for employment that meet their specific needs. Two employment pathways are the traditional employee vs. the independent contractor. Independent contractors represent approximately 1 in 10 workers according to NPR. Employees who take this path want to supplement income, have better job flexibility and desire to gain career experience for career success. Let’s begin by exploring some of the key differences between independent contracting and a regular employee.
What is an independent contractor?
An independent contractor, according to the IRS, is considered self-employed and is subject to Self-Employment Tax which is made up of Social Security and Medicare taxes currently at the rate of 15.3%. Types of independent contractors include consultants, freelancers, trade workers, artists, entrepreneurs and contract to hires.
The contract and tax laws
A contract is a document that outlines the specific details of the work to be completed and is signed before beginning work with a client. The contract should contain the company name, payment, expenses, length of the project, termination practices, and relationship of the parties. For taxes as an independent contractor, you are paid by the client without any taxes withheld and are responsible for setting aside money for the tax amount owed when you file your annual tax return. The amount you owe is based on your total income from all contracts in that calendar year. Speaking with a tax professional is recommended to help you determine how much money you might owe for your tax return and what tax considerations you need to take into account. The IRS has a helpful website for choosing a qualified professional.
Health insurance and additional benefits
Unlike employees receiving insurance and benefit options from their employer, independent contractors must seek these out on their own. The Health Insurance Marketplace is the most accessible place to find coverage with options based on estimated yearly earnings. Additionally, if your spouse has health insurance and you recently left a job and became self-employed, you can get added to their health insurance coverage as a special enrollment due to a Qualifying Life Event (QLE). Most independent contractors do not have benefits including 401K matching, paid time off, short-term disability, and unemployment benefits. However, you can negotiate for additional benefits when outlining the specifics of the contract with the client.
Pros to independent contracting
- – Be your own boss – You have the ability to control when, where, and how the work gets done while the client controls what that work is. This also means that you own the rights to the final project.
- – Set your schedule – Independent contractors often determine their own schedule and decide how many hours are worked. Deadlines and client priorities will contribute to scheduling work hours.
- – Higher pay – Most companies pay more for contract employees versus full-time employees since they aren’t paying for health insurance, unemployment compensation, and 401K matching and other full-time employee expenses.
- – Business expense deductions – You can often deduct purchases associated with your home office and other business expenses on your yearly tax return that typically aren’t eligible as an employee of a company. Several items that can often be deducted include credit card debt interest, vehicle maintenance and mileage, gifts for clients, meals with clients and vendors, training, business travel expenses, retirement savings, health insurance, equipment and supplies, and home office deductions
- – Gain industry experience – If you’re unsure if an industry is right for you, being a freelancer or independent contractor is a great way to begin without any full-time work obligations. You may also be able to work for several clients at the same time and gain more exposure in your desired industry.
- –Remote work – Due to the nature of independent contracting roles, you can often work from anywhere.
Cons to independent contracting
- – Taxes – As discussed earlier, taxes calculations are different for independent contracts and this can be overwhelming to some.
- – Unemployment benefits – Unlike traditional employees that are out of work, independent contractors typically aren’t eligible for unemployment benefits.
- – Tools & equipment – You can negotiate what equipment the client will provide as a part of the contract, but they aren’t required to provide anything unless specified in the contract.
- – Professional development – While most full-time employees are offered on-the-job training and professional development, independent contractors will be responsible for paying for any professional development or training required of the job.
- – Pay – Depending on the length of your contract, you may need to consistently market yourself for the next contract in order to sustain steady income or you could be left with gaps in employment as contracts end.
There are many considerations prior to making the decision to become an independent contractor. It’s important to weigh the pros and cons, explore options with different companies and speak with individuals who have navigated the process before you. If you’ve already registered with Hire Heroes USA and would like more information about contract work, log into your MyTrak and submit a Volunteer Request to speak with an industry professional.
Taylor Jernigan is a Talent Development Professional and volunteer at Hire Heroes USA. Hire Heroes USA provides free job search assistance to U.S. military members, veterans and their spouses, and we help companies connect with opportunities to hire them. We have a proven track record of success helping over 70,000 veterans and military spouses get hired since the company was founded. The services never expire. Sign up today at www.hireheroesusa.org.