Should I Be an Employee or a Contractor?

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The difference between being an employee and being an independent contractor can be somewhat slippery. The distinction between the two states of employment is subject to complicated regulations and has a great deal to do with taxes and who pays what to the government. In general, being an independent contractor rather than an employee means you pay more taxes and raises the financial complexity of your work life. However, it also gives you greater flexibility about how and when you do your job. If you’re debating whether to look for work as an employee or a contractor, consider the following:

Contractors pay the full share of their payroll taxes.

Employees pay only half of the taxes for Medicare, FICA, and Social Security, with their employer shouldering the other half. When you’re an independent contractor, you pay the full amount. The extra payments can add up to thousands of dollars per year.

Contractors usually do not get benefits.

Employees typically receive benefits ranging from paid vacation to health insurance and retirement plans. Combined, they can make up a significant percentage of total compensation. Contractors typically don’t receive the same level of benefits.

Contractors may retain intellectual-property rights.

In some industries, intellectual property rights have no bearing at all on a person’s work, but in others they can be crucial. Employees typically must assign patents and other intellectual property to their employer. Contractors may not have to do so.

Contractors enjoy more freedom.

Independent contractors, by IRS guidelines, must have a great deal of flexibility in how they do their work. They typically get to use their own tools, set their own hours, do their own hiring in terms of assistants, and remain free to work for multiple companies at once.

Being a contractor can be complicated.

Determining how much tax you owe to which agencies can be a headache-inducing endeavor. Employees typically enjoy a fairly simple working arrangement in which they do work and collect a paycheck for it. For contractors, sorting out payments, taxes, insurance, and expenses can be time consuming.

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