Do You Want to Be an Independent Contractor or Employee?

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If you have a choice to take a job as an employee or independent contractor, which one is better? It depends on a few factors.

First, Do You Have a Real Choice?

The IRS has a strict set of guidelines for determining whether someone is an independent contractor. Neither employers nor employees can choose one or the other just because it benefits them.

Where there's a gray area is when you're taking a job outside of the business's core operations. For example, if a restaurant wants to bring you in to handle their marketing, being an in-house employee or outside contractor could both be reasonable positions.

Next, Consider the Benefits

Signing on as an independent contractor means no employer-paid health insurance, retirement plan, or other benefits. On the other hand, it should mean more flexible scheduling and the ability to take on additional clients.

To make up for the benefits gap and possible lack of job stability, the general rule of thumb is that independent contractors should ask for two to three times what they would make as an employee. Keep this in mind when comparing offers or negotiating how you'll be brought into the company.

Finally, Consider the Taxes

Under the Tax Cuts and Jobs Act, the better tax position will usually be as an independent contractor.

The only real downsides to being an independent contractor are that you have to make estimated tax payments rather than having taxes withheld and cover the employer's portion of Social Security and Medicare Taxes (7.65%). However, unless you think your employer somehow wasn't considering those extra taxes when setting your salary, you end up paying the same amount.

The two huge benefits to being an independent contractor are:

  • Deducting any unreimbursed business expenses on your Schedule C. Employees no longer get to deduct unreimbursed expenses even if they itemize.

  • The ability to take the 20-percent pass-through deduction on your contractor income. Subject to a few restrictions for higher-earners, if you make $100,000, you only pay income tax on $80,000. As an alternative, you may also be able to form a corporation to take advantage of corporate income tax or dividend rates.

So which is best for you - employee or independent contractor? Book an appointment now to get help running the numbers.