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Working as a Contractor vs. Employee

Working as a Contractor vs. Employee

The various benefits of being a contractor have convinced many to leave behind their lives as employees and take a stab at being their own boss. If you are considering moving to independent contractor work, assessing the advantages, disadvantages, and differences between contractors and employees will help inform the decision.

What is a Contractor?

Independent contractors are self-employed workers separate from employees. According to the IRS, you are an independent contractor if the payer only has the right to control or direct the work’s outcome and not the method that you do the work.

Many people decide to become independent contractors because they can set their own schedules and payment. On top of that, independent contractors gain the freedom to work as much or as little as they want. When contractors sign on to complete a project or service for the company, their working relationship only lasts as long as the contract stipulates.

Independent contractors are independent. Without a boss, they can enjoy the freedom of contract work. When a contractor feels it’s not working out with a business, they are under no obligation to continue working with them once the contract is up.

The Difference Between Contractors and Employees

While the same employer could potentially employ them, there are many differences between contractors and employees. One of the most significant differences between contractors and employees is that employment labor laws do not protect contractors. Because of this, contractors receive pay only when employers receive an invoice or as indicated in the contract. Conversely, employees are protected by federal and state laws that require employees to receive pay on regular pay dates.

Contractors sign a contract with the employer when they come on board, indicating the total amount they will get. According to the Administration for Children & Families (ACF), payment could be hourly, daily or weekly until the contractor completes the job. In contrast, employees earn an hourly rate or salary.

Employees and contractors also see significant differences when it comes to taxes. Employees must report all money paid during the tax year on a W-2, while contractors only report payments of $600 or more on a Form 1099. Employees and contractors must be correctly classified. Nolo writes that intentional misclassification can result in paying social security and Medicare taxes out of pocket or ineligibility for unemployment and workers’ compensation benefits.

The Advantages to Working as a Contractor

For many, the most appealing aspect of working as a contractor is independence. Contractors can decide where, when, and how they work. While contractors don’t necessarily have complete control over how much they make, their income is dependent on the amount and quality of work they put in. Employees don’t typically have this much control over their work and are dependent on the decisions of those higher up in the company. Contractors are not reliant on a single company for income.

The benefits of being a contractor are not just limited to independence. Independent contractors can potentially be paid more than employees. According to Dice Insights, a Dice Salary Survey indicated that contractors employed by a staffing agency made around $5,000 more than the full-time employees polled. According to Nolo, the pay increase could be due to hiring firms not needing to pay Social Security taxes, unemployment compensation taxes, workers’ compensation coverage or employee benefits. However, the amount that contractors make boils down to negotiations, which can be trickier when a staffing agency does not employ them.

Contractors see additional advantages when it comes to income taxes. Contractors can take advantage of business-related tax deductions that employees cannot. The deductions must be reasonably related to the business, such as office and travel expenses.

The Disadvantages to Working as a Contractor

Despite the advantages of working as a contractor, there are several disadvantages. Contractors have much less job security than employees at a company because contractors receive pay per project. In contrast, employees can expect payment every month, assuming the business operates as it should.

Another major disadvantage to contract work is that contractors don’t have access to employer-provided benefits. Contractors do not receive paid sick leave or vacations. They must also seek their own solutions to health insurance and retirement plans.

This also means that independent contractors do not receive unemployment insurance benefits or employer-provided workers’ compensation. While independence grants contractors much flexibility to work how and when they want, they risk not having access to the benefits employees have.

Working as a Contractor

For many, the independence and freedom inherent with contract work far outweigh the disadvantages. While employees experience more stability, the day-to-day grind can cause adverse health effects and low morale.

Despite the disadvantages, contracting allows contractors to shape their work around their lives rather than shaping their lives around work. Without a boss to micromanage, independent contractors experience a significant amount of autonomy that they cannot experience as an employee.

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