Some of us will spend our careers in positions with traditional compensation methods. Salaried or hourly employees know all about punching the clock, filling out that time card and receiving those weekly paychecks with a stack of deductions for Uncle Sam. While traditional employee positions are certainly common, in a variety of career paths, freelance or independent contractor work is a typical arrangement.
In writing, some trades positions and a variety of service sectors it’s more common than not to run across positions that throw out the traditional W2. While rules regarding what types of positions can qualify for this status vary from state to state, the distinction between employee and independent contractor usually boils down to control and tools.
Independent contractors set their own hours and terms for performing labor and will supply most if not all of the equipment needed for the position. This work freedom is appealing to many but comes with some drawbacks and certain complicating factors as well.
From taxes to benefits, here we break down the pros and cons of accepting a position in which you’re classified as an independent contractor.
The Bad of 1099’s
Let’s pull off the proverbial band-aid, first…
As an independent contractor what you make on the job is what comes home with you at the end of the day. There are no taxes withheld from your pay. This makes you feel like you’re making out ahead. Did your mom ever told you there wasn’t such a thing as a free lunch? She was doubly right when it comes to independent contracts and taxes.
Taxes are still owed on the entire amount you earn as a 1099’er, they’re simply paid at the end of the year when you file your annual taxes. In addition, employers typically have to pay a portion of these items, such as social security and medicare,. But as an independent contractor, you’re responsible for this portion as well. So, you’ll likely end up with a higher overall taxed percentage of your take home pay.
There are other downsides in addition to the double taxation whammy. Paid vacations don’t exist and employer funded medical insurance instead becomes self-funded. And if there’s a dispute over pay? You’re on your own for following up with the client, often in terms of an escalating series of demand letters or eventually a day in court. When it comes to job stability, absent some other provision your client can terminate the contract at any time. Typical protections afforded employees regarding the valid cause for firing are completely out the window. Also, maintaining a regular work schedule is often difficult. After all, you must accommodate the needs of your individual clients.
The Upside to 1099
Think it’s all doom and gloom? There are plenty of upsides to being classified as an independent contractor. Fewer costs associated with utilizing 1099 work means these workers often command higher prices for similar skills or tasks. While you may not have set working hours, you often have greater flexibility for making your own schedule. If you’re motivated and able to create your own personal structure, the freedom of working independently may be just the thing for you.
There are also some tax benefits to help offset the previously mentioned downsides. Independent contracts may be able to deduct costs associated with their jobs that typical employees wouldn’t be able to. This includes tools, supplies, and gas or mileage for transportation to and from the worksite. If you work from home, you may also be able to deduct a portion of your mortgage or rent as well as utilities as a home office expense. Finally, as a 1099 worker, you may have access to additional retirement account options. These include SEP-IRA’s which allow you to stash away more of your money for retirement, tax-free.
What About Employers
It isn’t only workers that need to weigh the benefits and drawbacks of 1099 status. Employers should also be aware of how hiring an independent contractor affects their bottom line. For starters, tax withholding is non-existent simplifying paperwork and eliminating the need to pay employee taxes. In addition, if you hire an independent contractor you generally aren’t liable for their actions as you would be an employee. This can be handy in the event something goes wrong over the course of the job.
On the other hand, hiring someone as 1099 often means you can exercise less control over the final work product. This can be challenging if you have strict company policies for your work group. Firing an employee for cause is generally a pretty painless action. But terminating a contract of an independent contractor early could mean a day in court. Flexibility on hours is also a must when working with an independent contractor.
The 1099 Bottom Line
When considering picking up independent contractor work, enter into any agreement with your eyes wide open. There are definite upsides and drawbacks. And deciding on this method often comes down to how flexible you are in your profession.
Do you have a desire to step outside of the traditional employer/employee mold? Then an independent contractor arrangement may be the right solution for you.
For this post, YouTern thanks our friends at Simply Hired.