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Comparing Employment and Self-Employment

Self-Employment or Employment: Which Is Better?

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There is no right answer to the question as to which is better. When it comes to weighing regular employment against self-employment as an independent contractor, there is a whole host of issues that come into play. And for each person the importance of these individual factors will vary.

Below I've sorted out some of the pros and cons of each type of work situation to aid in making decisions. And keep in mind that you can even combine the two--with one client contracting your services and another hiring you as a part-time employee. These two types of income will have to be treated differently for tax purposes, though.

But first let's clarify exactly what each is:

Employees receive compensation on a regular basis (usually weekly or biweekly) for services rendered. The employer directs both how and when an employee works. Pay can be a salary or an hourly wage, or it can be paid on another basis, such as a per-call basis for call center agents or commission for salespeople. However, it must be at least the minimum hourly wage in the state where work was performed. Employer's pay half of employees' Medicare and Social Security tax through payroll taxes, and at tax time issue a W-2 that outlines compensation and taxes paid for the previous tax year.

Independent contractors are not as closely supervised as employees, usually setting their own schedules. They often may receive work on a project basis and may or may not be paid hourly. However, they are not subject to minimum wage laws. Independent contractors pay all of their own Social Security and Medicare taxes when they file their income taxes, through the self-employment tax, and they receive 1099-MISC at tax time.

Self-Employment Pros and Cons

For more details on each of the pros and cons listed below, read this article Self-Employment Pros and Cons.

Pros:

  • More freedom in scheduling and performing work
  • Tax-deductible business expenses
  • No taxes taken out of payments
  • Work-at-home positions more likely
  • Compensation rate may be higher

Cons:

  • All of Social Security and Medicare taxes paid by contractor through the self-employment tax
  • All tax payments made by contractor, which may mean making quarterly estimated tax payments
  • Costs of running a business incurred by contractor
  • No benefits
  • Less job security
  • Unemployment compensation not usually available
  • Payments often come on an irregular basis
  • Invoicing and collection is the responsibility of the contractor
  • No minimum wage protection

Generally taxes are more complicated for the self-employed. So for more information about taxes as an independent contractor, see:

Self-Employment Tax FAQ
Self-Employment Income
19 Self-Employment Deductions You Don't Want to Miss
The Independent Contractor's Tax Guide

Pros and Cons of Employment

For more details on these pros and cons read this article Pros and Cons of Employment.

Pros:

Cons:

    • Employer pays half Social Security and Medicare taxes
    • Employer collects payroll taxes in each paycheck, so no need for estimated tax payments
    • Protected by minimum wage laws
    • Often more job security
    • Benefits may be offered
    • Unemployment compensation may be available upon loss of job
    • Payments are made on a regular basis
    • Employer absorbs more costs related to work
    • Less flexibility in scheduling and work
    • Less likely to be work-at-home positions
    • Compensation rate may be lower
    • Regular compensation has taxes taken out, reducing the amount per payment
    • Home office expenses more difficult to deduct on taxes (but it is possible for an employee to deduct a home office)

What the Pros and Cons Mean to You

Each of the above pros and cons will factor in a little differently for each person and situation. For instance, some companies may make up for the greater taxes paid by independent contractors--and the lower costs the company incurs with contractors--by paying them a higher rate than it does employees. Many others do not.

 

Disclaimer
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.

In fact some may take advantage of the fact that minimum wage is not required, and offer payment for a project that when divided per hour is well below the minimum wage.

Though we often don't have a choice about whether to be an independent contractor or an employee, knowing the benefits and drawbacks of each allows us compare different opportunities. For more details about each type of opportunity, read these articles:

 

Disclaimer
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.

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