Wednesday, March 17, 2010

Independent Contractor versus Employee

When I was working, I used to think that being an independent contractor was an attractive financial option versus being an employee. Since retiring, I've learned more about the pros and cons of being an independent contractor. To me, unless I have a substantial small business (e.g. six figure revenue), I prefer being an employee over being an independent contractor. My reasons are summarized in the table below.

Employment Status

Independent Contractor

Employee for Company

PaymentAn independent contractor is typically paid on a gross basis. No federal, state, Social Security or Medicare taxes are withheld. These taxes must be paid by the independent contractor from the payment received. An employee is paid on a net basis. Federal, state, Social Security, and Medicare taxes are withheld for the employee. In addition, the employer pays 1/2 of the Social Security and Medicare taxes for the employee.
ExpensesExpenses for supplies, transportation, and materials are often paid by the independent contractor.Expenses for supplies, transportation and materials of usually covered by the employer.
TaxesIndependent contractors must file Schedule C, Profit or Loss from Business, to determine taxable income. In addition, an independent contractor often needs to pay estimated taxes, document revenue and expenses, and pay sales tax, if required.Employees generally enter income from a W-2 on the wage line of the tax form. Expense will usually be covered or reimbursed by the employer. If not, the employee would file a form 2106 to claim any deductions.
BenefitsThe independent contractor receives no benefits, and needs to provide their own health, liability and auto insurance.An employee is typically offered benefits and is covered by their employer's liability insurance.

From my experience, while the gross pay appears to be higher, an independent contractor position's net pay (after expenses, taxes, and benefits) is usually less than that of an equivalent employee. Perhaps, that is one reason companies hire independent contractors instead of employees :-)

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This is not financial, tax or career advice. Please consult a professional advisor.

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1 comment:

Grace. said...

I know how most financial gurus tout entrepreneurship, but having tried that for 8 out of the last 30 years in my profession, I do hear you. Give me an employer (with vacation pay and health benefits!) over being independant any day. The health coverage for my employees and the quarterly estimated taxes were killers. I discovered I just wasn't cut out to be a small business person.