Much of the time, people are hired as employees of a company.  Occasionally, someone may be hired as an independent contractor.  Although there are rules to follow for each – what circumstances differentiate the two options?  What are the reasons to choose one option over the other (if you are offered such a choice)? 

Let’s compare the two in the chart below: 

Business & Personal Circumstances Employee Independent Contractor
Payroll Taxes: Only pays employee portion of FICA, Medicare, Etc. Pays higher self-employment tax.
Employee Benefits: May receive better benefits if employer subsidizes health, life, disability, & retirement benefits. Not categorized as an employee, usually not able to receive the benefits an employee would.
Tax Advantages: Unreimbursed employee expenses are limited in deductibility. Has more flexibility to deduct all reasonable and necessary business expenses.
Work Costs/Expenses: Commuting, wardrobe, etc. usually not deductible. Often have other costs – such as office expenses and staffing.
Start Up Costs: Doesn’t have. Usually has.
Intellectual Property: Any intellectual property created during employment (like patents, for example) assigned to the employer. Normally retains the rights to the intellectual property.
Work hours: Normally required work hours during specific time frames. Works on their schedule.
Wages/ Bonuses: Receives salary/wages and possibly bonus(es). Usually works at an agreed-upon hourly wage and/or other set schedule between parties, not eligible for bonuses.
Potential emotional negatives: Politics of working for just one employer.

Employee can hit a glass ceiling, limit career opportunities & feel less in control of upward mobility.

May have to deal with solitude or loneliness.

May have to “resell” to sponsors, potentially be at the mercy of a end-of-year budget planning.

Motivation: Has structural motivation to succeed based on expected results to team/boss. Has to be self-motivating.

If you are struggling to decide, or just have questions regarding being an employee vs an independent contractor, please don’t hesitate to contact us so we can help put things in perspective!

 

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