WORKING AS AN INDEPENDENT CONTRACTOR VS WORKING AS AN EMPLOYEE
Business Owner’s Perspective
There is a lot involved in keeping a business afloat; however, managing human resources can be regarded as one of the most challenging aspects. Suppose you are unable to dedicate an efficient HR team to handle vital tasks like payroll administration, onboarding, employee relationships and the likes. In that case, you will have to shoulder these responsibilities yourself. Handling these tasks will eat up a great deal of time and energy.
That aside, you still have to account for monetary costs of staffing, which in some cases involves a huge sum—about 40% – 80% of a company’s budget. Considering this expense, many small businesses hire independent contractors for certain positions to help them cut back on costs and legal responsibilities.
Employee’s Perspective
However, looking from the perspective of a staff, which would you rather be? An independent contractor (1099) or W2 employee?
Here’s a brief comparison of bot
| Independent contractor | Employee |
| Enters into a contract with a client, usually after submitting a proposal. The contract must include a statement of work with the legal section of the business. | Applies for a job offer, gets recruited as a staff and must tender information such as citizenship status, date of birth, marital status, etc. |
| Tax document required includes name, address, Taxpayer Identification Number, and certification about back up withholding Visit disclaimer page on a W-9 | Tax document required includes name, address, social security number, tax filing status, and number of exemptions on a W-4 |
| Reports payments from $600 and above in a calendar year on a Form 1099 | Reports all payments received during the tax year on a W2 |
| Not covered by labor or employment laws | Covered by several labor and employment laws |
Perks of Being an Independent Contractor
Working as an independent contractor is great if you have marketable skills and can handle autonomy. It offers a number of great advantages over being a typical employer.
Assured Flexibility
Great flexibility comes with being an independent contractor; there’s no pressure from a single employer to take on compulsory assignments. You have the freedom to choose the kind of job offers you prefer, from whichever employer is in alignment with your terms. You simply become the boss you. You can schedule deadlines to fit your timing, as more emphasis is often placed on the finished product rather than the time it takes to complete a task.
No Tax Withholding
As a 1099 employer, you are fully in charge of your tax situation, and you can control it as you please. Being independent means you are not susceptible to withholding state, federal, or local tax by an employer, so your paycheck comes in full. Nothing at all is deducted from the original amount agreed upon in your contract. This way, you will enjoy an improved cash flow situation, and taking care of short-term financial obligations won’t be an issue.
However, independent contractors are required by the IRS to make quarterly estimated tax payments. You can only forfeit these payments if you qualify for certain exceptions; otherwise, underpayment will attract due punishment.
Potential Earning is Limitless
There is a limit to how much a typical W2 employee can earn from an employer, and unless a promotion is thrown in once in a while, the figure remains the same. In contrast, as a 1099 employee, there is no roof over your earnings. You determine your work hours and rate per hour, and prospective clients can either agree with your terms or further negotiate before employing you.
Since the business isn’t adding to your retirement plan or giving incidental advantages, you are at will to charge more than in-house employees for equivalent services.
Tax Deductions
The IRS believes independent contractors are self-employed entrepreneurs; you can leverage this opportunity to deduct various operational expenses on your income tax return. Starting in 2018, deductible expenses can incorporate office supplies, a few utility expenses, health insurance premiums, auto and travel expenses, and a portion of mortgage payments or home rent. Therefore, it is fundamental to keep thorough and exact records of all expenses incurred over the span of your business-related activities.
Also read – Key Differences Between Traditional Ira and Roth Ira
Conclusion
You may check all the boxes when assessing what it takes to be an independent contractor; however, it is advisable not to wing it. It is important to lean on the guidance of your Accountant, Bookkeeper or CPA to make sure you are taking all of the tax advantages, doing everything within the law, and paying enough estimated tax. Contact us today to help you take steps in the right direction.