Are you more suited to be a W-2 employee or an independent contractor? In this article, we delve into the ups and downs of these remote work types to help you decide which decide which employment classification works best for you.
Remote Work Types: W-2 Employee and Independent Contractor Pros and Cons
Both full-time employment and independent contractor arrangements have their perks and challenges. Many full-time employees, also called W-2 employees, don’t have to worry about buying healthcare insurance, withholding taxes from their paychecks, or continuously securing their income. On the other hand, W-2 employees are subject to their employer’s rules and may have a lot less control over their daily schedules. Independent contractors, such as freelancers, self-employed individuals, and anyone who receives a 1099 income tax form, tend to have more freedom, but they also bear a lot more responsibility.
If you’re wondering whether you should work as a full-time W-2 employee or as an independent contractor, consider the differences with respect to the following major remote work types.
1. Healthcare Benefits
W-2: W-2 employees usually get access to discounted healthcare when their employers purchase group plans. Prices can also drop as the company grows and more workers join the group. However, healthcare isn’t a guarantee. As healthinsurance.org confirms, under the Affordable Care Act, companies with less than 50 full-time equivalent employees are exempt from healthcare requirements and associated penalty fees. Therefore, if you work for a small company or startup, healthcare is more of an employment perk than a right.
Independent Contractor: Independent contractors are entirely on their own when it comes to healthcare. You need to research your own individual or family plan and pay out of pocket for all monthly or yearly premiums. The good news is that you can usually write your premiums and other related expenses off on your federal taxes.
2. Retirement Matching
W-2: You don’t have to be an employee to invest in retirement. However, many employers offer benefits packages that include investment matching. For example, some companies match up to 6% of your contributions per calendar year. Those numbers add up quickly and can create a substantial nest egg for you and your family in the future.
Independent Contractor: As an independent contractor, you have more freedom to choose the types of investments and financial institutions you want to use. However, though you have more freedom and flexibility, you also need to do more research and set up regular contributions. Plus, you don’t get any matching benefits from your employer or clients.
3. Income Tax Withholding
W-2: Employers save you a lot of hassle when it comes to income tax withholdings. They have their payroll pros set up automatic federal, state, and local deductions from your paycheck based on your annual earnings. Plus, they contribute to Medicare and Social Security accounts, which you may need in the future. However, if you have multiple jobs, don’t work a full year, or experience changes in pay scale, you may end up having too much or not enough money withdrawn from your income. In which case, you can either expect to owe the federal government or receive a “bonus” check the following April. You can always update your W-4 form to better match your employment situation, but it might take a few pay cycles for changes to kick in.
Independent Contractor: Independent contractors have a bit more control over how taxes get paid to the government. Though you have to fill out all the paperwork yourself and pay your estimated taxes quarterly, you may be able to more accurately calculate how much you’ll make by the end of the calendar year and, therefore, plan to owe or get money back the following April. Also, don’t forget to pay your state and local government tax, as required.
W-2: Employees who wow their managers can get promoted with an increase in pay or a prestigious title. Some employers even have annual or regularly scheduled pay raises and bonus programs based on employee performance criteria.
Independent Contractor: As a contractor, you can set your own rates for the most part. So, if you want a promotion, you simply increase your fees. Plus, you don’t have to wait for a manager to tell you that you’re worth more – you can start charging more at any time or whenever you earn a new credential. However, you’re never guaranteed business, so there may be times when you’re forced to take a hit regardless of your accomplishments.
5. Tuition Reimbursement
W-2: Employers may offer tuition reimbursement so that employees can pursue additional degrees or job-related certifications within their areas of expertise. They usually ask you to work for a certain number of years after your graduation, but you still get to walk away with advanced education. Employers may also provide pre-paid online classes and reimburse employees for any continued education that helps you do your job better.
Independent Contractor: Contractors are responsible for all their own continued education. However, Jean Murray, a writer for The Balance Small Business, reminds contractors that education expenses directly related to the advancement of your business can usually be deducted from taxes.
6. Professional Development
W-2: Alongside formal education, employers may pay for you to attend workshops, international conferences, and industry events. They may also provide speakers, in-house lunch-and-learns, and other services for enhanced professional development.
Independent Contractor: Once again, contractors are responsible for their own advancement but can generally deduct professional development expenses on their tax returns. For example, you can usually deduct industry conference expenses, such as admission tickets, airfare, hotel, and cab fare, so long as they are solely for professional development and you keep your receipts.
7. Job Security
W-2: In a way, employees don’t have to worry about whether they will be able to go to work the next day. Though companies come and go, many employees feel relatively secure in their positions. Plus, employees who feel unstable can simply search for their same job at another company and do pretty much the same thing elsewhere.
Independent Contractor: Contractors, on the other hand, typically need to attract new clients continuously. They also need to maintain relationships with clients to arrange repeat business. So, contractors not only perform the actual work, but they also serve as sales and marketing agents to secure their income. As Holly Johnson, contributor to The Simple Dollar, argues, freelancing and other contract work can help diversify income, prevent total income loss due to one layoff, and remove earning limits. Though it may take more effort to stabilize, contract arrangements may afford more security in the long term.
8. Unemployment Compensation
W-2: Employees who lose their jobs through no fault of their own are entitled to unemployment compensation, which provides temporary monetary relief until they find new jobs. Thus, if you get “let go” or if your boss closes the doors without warning one day, you should be able to float until you secure new employment.
Independent Contractor: Contractors are independent agents responsible for acquiring their own income. Therefore, if an employer terminates a contract, even within agreed upon terms, the contractor is not entitled to unemployment compensation. However, there may be repercussions if your employer terminates your contract by way of breaching the contract terms. Nonetheless, contract breaches are a different legal matter and don’t relate to unemployment compensation.
W-2: Employees typically have to adhere to their company’s regular business hours. However, an increasing number of companies recognize the benefits of flexible schedules and implement more relaxed expectations. Regardless, employers have the authority to dictate and modify an employee’s work schedule.
Independent Contractor: Contractors need to be available for their clients and deliver products and services on time, but they can typically do their work whenever they want or as their job requires. They aren’t necessarily bound by a company’s regular business hours, except for meetings, emails, phone calls, and presentations.
10. Time Off
W-2: Employees usually need to request vacation time, call in sick, and explain any absence. Plus, they’re usually given a certain amount of days per year for paid time off. If they go over their allotment, they may receive unpaid leave or owe the company via work hours or future time off. However, the Family and Medical Leave Act (FMLA) entitles eligible employees to extended unpaid, job-protected leave.
Independent Contractor: Contractors don’t need to file any paperwork to take days off, but they usually don’t receive paid leave benefits. Also, they typically don’t get paid for holidays, and they usually don’t qualify for FMLA. So, new parents, caregivers, and sick or injured contractors need to find ways to replace lost income due to expected or unexpected circumstances.
11. Workers’ Compensation
W-2: Remote employees who have to travel to a client site or headquarters to perform some of their work tasks should be covered under their employer’s workers’ compensation insurance. Therefore, they are entitled to compensation for injuries or illness incurred as a direct result of work.
Independent Contractor: Contractors are not eligible for workers’ compensation by default, as employers are not required to provide it by law. Therefore, contractors who travel or who are expected to perform manual labor that directly relates to their job tasks should consider including provisions in their contracts on how to handle workplace injuries and illnesses.
12. Tax Deductions
W-2: Employees may get to deduct some work expenses from their taxes, but they typically report costs to employers and receive compensation. However, if you’re a remote employee who works from home, consult a tax professional to see if you can deduct items like your home office, mileage and travel expenses, and work equipment.
Independent Contractor: Since they are considered self-employed, independent contractors can take advantage of numerous tax deductions. Mileage, supplies, equipment, cell phone bills, Internet fees, and other work-related items can be deducted from federal returns. As a word of caution, be sure to completely separate your work equipment, space, and supplies from your personal items. The more you differentiate between personal and professional expenses, the easier it will be to back-up your tax return.
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