Do you benefit more by being an independent contractor vs. an employee?

Throughout the pandemic we have continued to see record highs around the turnover within the workforce. The pandemic shed new light around the concept of work-life balance and flexibility within the corporate world. But not only has there been turnover, there has also been an increase in those creating side hustles or seeking out additional income from their 9-5’s to support their families or lifestyle.

With this wave of change over the workforce, I thought it would be relevant to discuss the the new “Gig Economy” momentum and increase in independent contractors over the last 5 years.

There are a few key considerations that I want everyone to know before they sign up to be an independent contractor and perhaps why it may benefit you more than being an employee!

Momentum in the Independent Contractor Space

An independent contractor is hired to perform work for a company in accordance with the terms of the contract negotiated. However, this individual is not an employee of the company.

A few examples of independent contractors that are not employees but are being paid an income by a company as a result of the work they are providing or performing for them:

• Delivery Drivers
  • Uber eats, Amazon, Doordash, Grubhub
• Freelancers
  • An app developer, web designer, social media manager, contracted legal work, writer or virtual assistant…the list is endless
• Affiliate Marketing and Partnership
  • If you are on Instagram or TikTok, you know or have seen this in action many times. Individuals are being hired and paid by a company to promote or market their business using social media.
    
    

These are just a few examples of different types of independent contract work that we are starting to see more and more of in the past few years but there are SO many more examples.

Independent contractors are being paid by a company for providing goods or services, and yet not being tied to or employed by the company. So how does that work?

Employee vs. Independent Contractor

One of the major differences between being an independent contractor vs an employee are based on the benefits provided to them.

An employee may receive the following benefits from their employer:

• Benefits:
  • Health insurance, paid time off and retirement match contributions
• Payroll Tax:
  • Employers will withhold and file required payroll taxes
  • Employer also pays half of the employees self-employment tax (as discussed below)
  • The employee will receive a W-2 to report income
• Professional Support:
  • Training, education and support to enhance individuals professional expertise will be provided by the employer
• Reimbursed Business Expenses:
  • The employer will often reimburse the employee for business related expenses paid for personally
    
    

An independent contractor typically would not receive any of the above benefits from the company they are hired by.

The Pros of The Independent Life

Although an independent contractor may not receive any benefits or perks from the company as listed above, they will benefit from the following:

• Increased Pay:
  • You have the opportunity to be paid more as an independent contractor than as an employee considering the employer will not be providing you with any additional benefits or paying taxes on your behalf.
• Tax Benefits:
  • They will receive a 1099 at the end of the year to be reported on their Schedule C of their tax return.
  • The benefit to the individual is that they will be able to deduct business related expenses like transportation costs, phone expenses, business supplies, healthcare premiums, etc. that they would not have been able to deduct had they been an employee.
• Home Office Deductions:
  • Many independent contractors primary place of work is in their own home, meaning that they may be eligible for home office deductions. This allows you to deduct a portion of utilities, rent, insurance, real estate taxes, etc. based on the square footage of your home office. Important to consult a CPA on this!
• Increased Flexibility & Autonomy:
  • They have more freedom to perform their work
    
    

Employees Are Expensive

There are a number of different costs and variables that go into the actual expense of an employee.

But as a general rule of thumb, an employee costs an employer about 1.25 to 1.4 times the salary of the employee, depending on a few variables (1).

In other words, if you were being paid a $100,000 salary, it may cost your employer anywhere between $125,000 to $140,000 to keep you on as an employee.

Many employers provide their employees with health insurance benefits, retirement contributions, paid time off along with additional perks within the office.

Hiring an employee also means considerable payroll tax costs. An employer is responsible for Federal and State unemployment taxes along with half of the employees self-employment taxes.

• The employer share of Self- Employment Tax is 7.65% on compensation up to $142,800 (annual wage base for 2021), plus 1.45% on compensation over the annual wage base.
  
  

So when thinking about that….if a company is hiring you as an independent contractor, they have no other costs associated with you other than paying you for your services. So what opportunity does this create for you?

You Can Negotiate More Money as an Independent Contractor

You, as the independent contractor, have every right and every reason to increase the value of your services and negotiate to be paid at a higher rate. Why? Because the company is paying roughly 25% less as a result of hiring you as an independent contractor vs. a full time employee.

Your negotiating power is upwards of 15%-20% greater than a W-2 employee. With that knowledge in mind you will be able to position yourself better. Remember it is all in the way you market yourself and express the benefit to the employer.

Now you will be able to negotiate and position your higher pay as an opportunity for the employer to save.

For example:If a W-2 employee in your line of work and level of experience makes approximately $75,000, it would be reasonable to request to be paid $85,000 – $90,000.

Going back to the average that employees cost their employers roughly 1.25 to 1.4 times the salary of the employee….An employee who makes $75,000 would cost an employer on average somewhere between $94,000 – $105,000.

An independent contractor could ask for $90,000 annually and position it in a way that your employer may have the opportunity to save roughly $4,000 – $15,000 by hiring you vs. a full time employee.

For large corporations they may not be as of an attractive sell, but for small business owners – that is meaningful!

Some Additional Things to Consider

• Taxes:
  • If you are an independent contractor or receiving a 1099, keep in mind, that while you have been receiving payment for your services you have not been withholding any tax on that income. You will want to discuss those figures with your CPA and discuss paying estimated quarterly tax payments.
• Benefits & Job Security:
  • As an independent contractor you receives no additional employment benefits and are not a full time employee of the employer. So be sure to keep a substantial amount of savings on the side to prepare for a change in employment circumstances. Contract work cannot always be relied upon for long term work.
• Loans:
  • It is typically more challenging to receive a loan – a mortgage, car loan, etc. if you are an independent contractor vs. a full time employee. Keep that in mind before leaving your full time job if you are in the process of purchasing a home or looking for a loan of some sort.
    
    

The independent contractor life is not for everyone – but you can certainly make a good argument for why it makes sense for many!

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(1) https://www.sba.gov/blog/how-much-does-employee-cost-you