Are you classified as an independent contractor or an employee? If you do not know, it is easy to tell the difference. An employee is someone who works for the company, follows the company’s policies in house, and is managed by the company. An independent contractor sets his or her own hours, works when he or she wants, and performs the job the way he or she wants.
Although the two may seem quite closely related, they are entirely different in the eyes of the IRS and it is important for all businesses and consumers to know the difference.
The IRS takes the employee and contractor distinction to heart and businesses will face fines if they are not properly categorizing the people who work for them. One of the biggest problems with hiring independent contractors is that once the employer starts requiring the contractor to work specific hours or within a specific time frame, the contractor becomes an employee.
Some small businesses do not want to have to worry about the additional costs and paperwork that go along with employees, so they opt in to hire contractors however, they treat the contractors like employees.
Independent Contractors Save Companies Money
It is no secret that independent contractors save companies money and a lot of it. When a company hires an employee, the company must pay for insurance, payroll, taxes, and even workers’ compensation. With an independent contractor, the company does not have to pay these additional fees.
Employees Make Higher Wages, but It’s Taxable Income
One reason some people enjoy working as an independent contractor is because they are able to make more money per paycheck. For example, if you work in a retail position making $10 an hour, you are not actually making $10 an hour. You have taxes withheld from your check making your hourly wage less than what it is stated to be.
As an independent contractor, your employer is not responsible for withholding any taxes so you actually do make the amount you agreed to and you would receive the full $10 per hour.
Now, this may sound lucrative to you, especially if you need the cash, but come tax time, you are going to take a huge hit. If you are not making any estimated tax payments throughout the year, you will soon learn the downside to being an independent contractor.
Becoming an Independent Contractor or an Employee
Choosing between becoming an independent contractor or an employee is a choice that is left up to you. There are pros and cons to each one and everyone finds that one over the other works for them.
If you want to be an employee for a company, keep in mind that you do not have to worry about paying additional taxes at the end of the year on the money you earned. On the other hand, you do have to work for a boss and you are told when to work and how to work.
If you want to work as an independent contractor, you can set your own working hours and how you plan to work. You are not tied to a desk and you can take vacations whenever you want and there will be no one hovering over your shoulder watching you work. On the other hand, though, you do have to pay more in taxes at the end of the year and this can be a hefty payment depending on how much money you made that year.
As you can see, there are pros and cons to each. When you are choosing between the two, consider how long you plan to work in the position and what type of working condition you prefer.
Many entrepreneurs who are looking to start their own business benefit from becoming an independent contractor. This is because they can choose the products they want to work on or with and they can choose the hours that work within their lifestyle.
If you do choose to work as an independent contractor, make sure you speak with a professional tax agent when it comes time to file your taxes. You will find that your tax agent is knowledgeable and can tell you what the best move is for you.
Financial Balance LLC