FAQ and Helpful Articles
Work at Home and set your own Schedule
An agent was finishing his certification in a technical field that is highly sought after in the call center industry. He wants to determine his career path early, and was referred to me with this question: “I’m trying to decide whether to seek a job as an employee or become an independent contractor. My skill is valuable, and I’m simply trying to determine how to best apply it.”
Usually I’m being asked the employee versus independent contractor question as part of a tax strategy. An employer wants to have a key resource classified as an independent contractor in order to avoid employment taxes and benefit costs. The question is what distinguishes the two for tax purposes. Here, the caller is truly trying to understand the distinction for career purposes. His question is really, “Do I want to work for myself or someone else?”
Let’s take a big picture look at this inquiry. We can break the employee versus independent contractor question into categories. While I recognize that some employees are highly independent, and some independent contractors have structured tasks for a single contractor, generalizations can be made. What I seek to do is highlight typical circumstances distinguishing the employed from the self-employed.
An employee only has to pay the employee part of FICA, Medicare, etc. and uses a W2. An independent contractor must pay the higher self-employment tax and use form 1099. As this agents income increases, he will face a noticeably higher employment tax burden as an independent contractor.
An employee may be able to obtain better benefits than an independent contractor. Employer subsidized health, life, disability and retirement benefits represent part of the “hidden paycheck” for employees that independent contractors don’t always enjoy.
An employee does not have the same tax advantages as the self-employed for business expenses. While un-reimbursed employee business expenses are limited in deductible valu, the independent contractor can write off all reasonable and necessary business expenses.
An employee will probably not have many costs beyond commuting, business clothes and other costs of the profession. Independent contractors, however, often have office expenses and staffing costs. This agent may incur significant equipment costs if he doesn’t already have a computer with internet.
An employee would not have start-up costs; an independent contractor will.
An employee will likely have to assign any intellectual property created during employment, such as patents, to the employer. The independent contractor normally retains these rights. For the agent, this could be a major distinction.
An employee often has required hours; an independent contractor does not.
An employee receives a salary and possible bonus; an independent contractor has no barriers or upper limits to gain.
Consider the emotional negatives for both. Employees have to deal with the politics of working for a single employer. An independent contractor may have to deal with solitude and loneliness.
Consider the emotional positives for both. An employee gets to collaborate with others and have a social structure within the workplace. An independent contractor gets to be his or her own boss.
Working for a single employer, the employee can hit a glass ceiling, be limited in career opportunities and generally feel less in control of upward mobility. An independent contractor may have to constantly “resell” to sponsors and be at the mercy of their end-of-year budget planning.
An employee has the structural motivation to succeed because either the boss or the team expects results. An independent contractor must be self-motivating.
I’ve been both an employee and self-employed. I’ve always told people that a big part of the difference between the two is motivation. If something goes wrong for an employee, it may not be too bad because it’s often part of a group failure; and, short of termination, the personal financial consequences aren’t devastating. There’s still a salary. A self-employed person, however, can suffer on both fronts. Often the failure is square on his or her shoulders, and the financial consequences are immediate. No sale, no commission. If the bid is not accepted, there’s no cash flow. Compare, however, the opportunity for upside potential. An employee can share in successes, but often they are team successes. And, the financial consequences of that success first inure to the employer. The self-employed can immediately enjoy the fruits of success. My victory; my payday.
So, how did I conclude my conversation with the agent trying to map out his career? I suggested this very basic model for consideration.
If you want to be a collaborator, part of a team, and comparatively free of many operational business decisions, you should consider seeking employment.
If you want to be an entrepreneur, your own person, you should consider being an independent contractor.
Credit where credit is due: Originaly written by : Steve Parrish
FAQ and Helpful Articles