If you work for somebody, there’s a good chance you are either an employee or an independent contractor. Is there a difference and does it matter? Yes and yes.
Most people with a job are an employee. This means you show up at a particular time, do your work, have a boss, and get paid a certain amount per hour or week.
If you’re an employee you typically get paid each week or maybe twice a month. At the end of the year, the company totals what you made and reports this information to you (and the IRS) on a form called a W-2.
The advantages of being an employee are that you have a pretty good idea how much you are going to make a month and have some job stability. You may even have some company perks like free or reduced cost health insurance, a paid cell phone, access to a 401(k), and even paid vacation time. Of course, if you work for a cool tech company you might get free massages and access to onsite gourmet cafes and bowling!
Want to know what company perk I got at my first job? I had the privilege of being able to buy, yes buy, old pies the restaurant couldn’t sell. Move over Google with your fancy onsite barber shop, laundromat, and fine cuisine. I got stale pie. Nothing says we value you like charging for spoiled baked goods.
An employee has a tight relationship with her employer. The employer is legally bound to do certain things for their employees. There are federal and state regulations that control the rules of the relationship, such as the minimum amount the employer can pay an employee, work hours, safety, etc. There is a level of commitment to the relationship.
Okay, so if the employee and employer relationship is like “going steady,” then the independent contractor relationship is like having a fling.
An independent contractor still has a “job” and still gets paid but the relationship is a little different. The “independent” in independent contractor means that the person is hired by a company but there are less controls and regulations. If you’re an employee you may need to get approval from the company to work another job. If you’re an independent contractor, you can do whatever you want. Can you say “hall pass?”
An independent contractor can have more flexibility and freedom in the job they perform, where they perform it, and when they perform it. There are no rules on how much you get paid or overtime hours. The company won’t give you health insurance or access to their 401(k) plan. Independent means just that. You are a hired hand that comes in and does a job. Instead of getting a W-2 that reports your income, when you are an independent contractor you get a form called a 1099.
If you think it sounds like it would be better to be an employee, I think most people would agree with you. Of course, the Smurfs movie made over half a billion dollars, so popularity isn’t always a good guide for what’s good!
As an independent contractor you have your own business – it’s you! You can market your services to other companies. For example, instead of working in accounting as an employee, you could use your same accounting skills but be an independent contractor for ten different companies. You can set your own hours and charge whatever the companies will pay you.
It’s true that as an independent contractor you may not get all of the perks you might as an employee like health insurance or a 401(k), but as a business owner, you can set up your own retirement plan and give yourself your own benefits. There are also a lot more options to use business expenses as deductions to reduce your taxes.
As the so-called “flex economy” grows, more and more people are either choosing or being forced to become independent contractors. Some people are an employee by day and work as an independent contractor by night such as driving for Uber.
The real lesson is to understand the difference between the two so you can better evaluate any opportunities that come your way. Does being your own boss make sense for your career path?
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.