As employers face the struggle of hiring in a competitive candidate market, they are more frequently turning to alternative forms of employment. While this opens up a number of opportunities for employees, there is often an abundance of questions about the nature and responsibilities involved with being a contractor versus a full-time employee. In this blog, we’re going to break down the pros and cons of each employment type with the goal of answering those inquiries along the way.

Becoming a Full-time Employee

One of the major perks of full-time employment is the job security, as well as the fact that it enables you to work with a company that you love and a team that you fit well with – if you’re able to find one that is. If you’re unsure of your long-term career plan, committing to a role as a full-time employee can pigeon hole your future career opportunities.

As a W2 employee, your employer pays half of your Social Security and Medicare, which independent contractors are 100% responsible for. You’re also more likely to be eligible for a variety of benefits from your employer, such as healthcare, paid time off, and 401(k) options. That being said, you’re limited in what business expenses you’re able to deduct from your taxes and how much money you can defer to your 401(k). While the traditional employment route may be more convenient, you’re likely able to make a larger paycheck in one of the following contractor positions.

Becoming a W2 Contractor

Working as a W2 contractor is a comparable setup to that of a full-time employee, except on a temporary, contract basis. When it comes to filing taxes, your employer will withhold income taxes on your behalf, along with withholding and paying Social Security and Medicare. Like a full-time employee, you’re also potentially eligible for some benefits such as healthcare coverage. However, because your employer or staffing firm is covering these tax and healthcare costs, you may earn a lower pay rate than other contractors.

Despite the similarities between these two types of employment, there are a few important differences. For example, because W2 contractors move between organizations, they have more opportunities to learn new skillsets and develop their preexisting abilities. Since the length of each contract varies, they also have increased flexibility in their professional roles and personal lives. On the flip side, as a W2 contractor, you may have a more difficult time integrating into each new team since you’re working on a temporary basis.

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Becoming a 1099 Contractor

Operating as a 1099 contractor is more difficult than the two previous employment options as you must first create an unincorporated business. Essentially, this type of business entity is an extension of you; you don’t have to open a separate bank account. As the simplest kind of organization to setup or discontinue, you’re granted a lot of flexibility as a 1099 contractor. You’re able to defer a greater amount of money to your retirement account than a W2 employer or contractor and you can deduct more business expenses. Since you’re handling all your own taxes and billing, you can also charge a more expensive rate as a 1099 contractor than a W2 contractor or employee.

As contractor options go though, the 1099 contractor route probably has the most disadvantages, especially related to taxes. Since you and your business are one entity, all liabilities fall on you. You’re 100% responsible for paying self-employment tax, as well as income tax, Social Security, and Medicare. Since you’re covering your own taxes, you must make quarterly estimated payments. In addition, you’ll have to cover your own benefits, including healthcare coverage.

Becoming a Corp-to-Corp Contractor

Corp-to-corp contractors create an incorporated business where they’re the employee and the companies that they work with are contracted vendors. Unlike 1099 contractors, any liability incurred isn’t personal – C2C contractors are employees, avoiding the obligation to pay self-employment taxes and allowing them to defer the largest amount of money to any retirement accounts. Being a C2C contractor gives you ultimate flexibility as far as variety and frequency of work.

In this position, you’d be managing the operations and accounting for your business, enabling you to charge a higher rate in order to cover these expenses. From setting up the corporation to understanding the accounting responsibilities necessary to remain compliant with current legislation, you have to have extensive knowledge of back office operations. Regardless of your profits, you’re required to pay a minimum tax for the corporation, and you’re obligated to cover mandatory healthcare coverage and other benefits. Being a C2C contractor gives you ultimate flexibility as far as variety and frequency of work.

Deciding between contracting and full time employment is no easy task – reach out to a KORE1 team member today to discuss your options and which is the best fit for you.

 

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