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Self-Employment Pros and Cons

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When trying to decide if self-employment or regular employment is better for you, consider these pros and cons of self-employment.

Pros of Self-Employment:

  • More freedom in scheduling and performing work. Because the IRS defines an independent contractor as someone that a company does not direct "the means and methods" by which they work, they naturally have more freedom in their schedule. Independent contractors are often given work on a project basis and paid upon completion of the work.
  • Work-at-home positions more likely. While independent contractors can work in an office, because they are not as closely overseen as employees they are more likely to work at home. In fact, it can be a benefit for a company to hire contractors because it doesn’t need to provide office space for them.
  • Tax-deductible business expenses. The self-employed can write off a number of different business expenses on their income taxes. Among the self-employment tax deductions work-at-home contractors enjoy is the home office deduction. Learn more about both these deductions and self-employment income in The Independent Contractor’s Tax Guide.
  • No taxes taken out of payments. The checks that independent contractors receive from clients are typically larger than they would as employees because not taxes are taken out. That doesn’t mean they don’t own taxes but they get more money upfront.
  • Compensation may be higher. Because hiring a contractor may be cheaper for a company, it may be able to offer a higher rate of compensation. However, this is by no means always the case.

Cons of Self-Employment:

  • Higher taxes. Employers pay half the cost of an employee’s Social Security and Medicare taxes. Contractors pay all of these taxes through the self-employment tax.
  • Tax payments. Employers collect income and payroll taxes through payroll deductions and send them to the government. The independent contractor must take are of sending in these payments and quarterly estimated tax payments may be required.
  • Cost of running a business. While it’s nice that the costs of running a business are tax deductible, it’s even nicer when someone else pays for your Internet connection, office supplies and other business needs. Typically employers pay for these types of costs.
  • No benefits. Benefits such as health insurance, vacation, retirement plans, etc. are offered to employees only,
  • Less job security. Companies hire independent contractors often because they have short-term projects or an irregular work flow. Contractors work may come in feast or famine stints.
  • Payments often come on an irregular basis. Just as the work can be irregular, so too does the payments. This can make personal budgeting difficult.
  • Invoicing and collection is the responsibility of the contractor.Unlike a paycheck, which comes on schedule with no action by the employee, a contractor must usually send an invoice to be paid. And if the invoice is not paid on time, it is the contractor who must follow up to ensure payment. And in a few cases clients may never pay at all, which means it falls on the contractor to take legal action or accept being stiffed.
  • Not required to receive the minimum wage. Because independent contract is often done on a project basis, there is no guarantee what the hourly rate might be or whether it is greater than the minimum wage.

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