When trying to decide if self-employment or regular employment is better for you, consider these pros and cons of an employment situation.
Pros of Employment:
- Employer pays half Social Security and Medicare taxes. In an employment position, employers are required pay half an employee's Social Security and Medicare taxes and the employee pays half. The self-employed pay both halves, which together total 15.3 percent of compensation, through the self-employment tax.
- Employer collects payroll taxes in paycheck. While no one likes to see taxes taken out of a paycheck, payroll taxes are convenient for the employee who does not have to calculate amounts and send checks to the government, as with quarterly estimated tax payments.
- Employees are protected by minimum wage laws. Independent contractors are not protected by these laws and therefore may be paid less than minimum wage.
- Job security is likely better. While employment by itself is certainly no guarantee of job security, employers invest more time and training in employees than contractors.
- Unemployment may be available if you lose your job. Employers pay into unemployment insurance, but typically contractors do not. So, if you lose your job as an employee, you may--depending on the circumstances--be able to collect unemployment.
- Benefits may be offered. Certainly not all jobs include benefits like paid vacation, health insurance and retirement plans, but contracting positions never do. This is one reason companies hire contractors--to save money on benefits.
- Payments are made on a regular basis. Employees receive paychecks on a regularly scheduled basis, usually biweekly or weekly. Independent contractors are often paid for all work at the end of a project, which could go on for a month or longer.
- Employers absorb more costs related to work. While employees can incur some costs (like uniforms and home office expenses), generally companies pay for the items employees need to do their jobs. The self-employed must pay for these business expenses.
Cons of Employment:
- Employees enjoy less flexibility in scheduling and work. Employees are expected to be at work (even if they work from home) at certain times. The work they do may be closely supervised. Contractors enjoy significantly more freedom, working on their own schedule until the tasks are complete.
- Positions are less likely to be work-at-home. While there are many work-at-home employment positions, the freedom of schedule that comes with contracting makes working from home more likely as a contractor.
- Compensation rate may be lower. Because companies pay for benefits and payroll taxes, employees are generally more expensive. They may offset this by offering lower per hour compensation.
- Regular compensation has payroll taxes taken out. That means the amount per payment is less and the government is holding more of your money for taxes longer than if you made estimated tax payments.
- Home office expenses are more difficult to deduct on taxes. However, it is possible for an employee to deduct a home office, but there are more conditions, including that the employee must work at home for the convenience of the employer.
I am not a tax attorney, CPA or tax preparation specialist. The information here is meant as a general guide. For specific questions about your own taxes, please refer to IRS publications or consult a tax specialist.