Contractor or employee: which for you?

Contractor or employee: which for you?

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Being your own boss might sound like a dream career path, but be careful what you wish for. Owning your own business, even a consulting company, brings with it all of the of the details and paperwork required to keep a small business afloat.

On the other hand, it’s much easier to start your own business if you do some planning in advance – you can even predict whether or not your new business will succeed or fail to a pretty certain degree (see links below).

Understanding the benefits and disadvantages of being a contractor will help you decide if flying solo is right for you.

Contractors have more freedom, but more responsibilities, as well

What is a Contractor?

Contractors are workers who negotiate agreements that allow them to work for a business without the formal and legal agreements that govern an employer/employee relationship. Contractors often have work arrangements with limited timeframes, or open-ended contracts either party can cancel on short notice. Government laws such as those governing breaks, social security contributions and minimum wage don’t apply to contractors. People who hire you are not your employers and cannot tell you exactly how to perform your work, set your hours, give you a dress code, require you to work in their office or mandate that you use their equipment or computers.

You Keep More Money

When you work for an employer, you get a set salary, bonus or commission. Not matter how you’re paid, most of the money you generate goes to your employer. When you own your own business, you keep all of the money. Yes, you’ll have more expenses to run your business, but you’ll keep all of that $40 or $60 or $100 per hour you bill.

No More Boss

Being a contractor gives you the freedom to set your own hours, take only the work you enjoy doing, complete projects without a supervisor micromanaging you, and otherwise running your own show. The downside to being your own boss is that you must also take on the burdens that go with this role, such as handling bookkeeping, marketing yourself to keep money coming in, performing detail work such as record-keeping, and chasing down clients who don’t pay on time.

There’s Plenty of Help Available

Read Steve’s SmartyCents article on How to Write a Business Plan the Right Way to learn how you can predict how likely it is your business will succeed or fail before you invest much money into your idea. Steve created 10 more articles in the Smarty Cents small-business library to help you get going.

If you’re not going to be making a product, Steve lays out how easy it is to start and manage a consulting business in his Knew Money article, Starting Your Own Consulting Or Service Business Is Easier Than You Think.

You’ll Work More Hours

When you work for yourself, you not only do the specific work related to your product or service, you’ll also put in hour running a small business. This can include bookkeeping, writing proposals, making sales calls, updating your website and interviewing vendors and supplier.

If you love what you do and you’re making plenty of money, you won’t mind the extra hours. If you want to spend more time with family and friends, estimate how many hours per week you’ll need to put into your company the first year to see if being your own boss is right for you.

You Have Reduced Access to Benefits

Working on your own can prevent you from receiving the low-cost group benefits an employee receives, including health insurance and retirement contributions. On the other hand, one of pros of being a contractor is that you are not stuck with employer-provided benefits and can shop for the ones that best suit you. You can often get access to attractive group benefits by joining a trade association.

Tax Write-Offs for Contractors

One of the disadvantages of being a contractor is that you must pay self-employment tax, with no employer contribution toward your Social Security and Medicare taxes. This doubles your tax burden from 7.65 as an employee to 15.3 percent of the first $137,700 you make as a contractor, as of 2020.

On the upside, as a contractor, you can take tax deductions for expenses such as a home office, travel, lodging, local mileage, meals and marketing. If your employer offers you the opportunity to become a contractor – even if the offer comes with a raise – meet with a qualified tax planner before making the move to determine if increased taxes will put you in the hole. For example, if you incorporate, you might be able to take your pay as a distribution of profits and avoid the 7.65 percent payroll tax.

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