Last week at KORE1, we discussed the various pros and cons of hiring contractors vs full time employees. But what if you’re the employee or contractor, and you’re trying to discern which scenario is the best route? Below is the guide for you.

As employers face the struggles of hiring in a competitive candidate market, they are more frequently turning to alternatives forms of employment. This opens up a number of windows for you, the employee. However, this conversation comes with an abundance of complex questions about the nature and responsibilities of being a contractor or full time employee. We hope the following summary begins to address those questions.

Becoming a Full Time Employee

Pros Obviously being a Full Time Employee is an option most people are entirely familiar with. Just fill out a W4 when you start, update it as regularly as you need, and you’ll receive a W2 form every year in order to file you taxes at tax time. It’s straightforward if you want the bare minimum of bookkeeping responsibilities. Also, many people don’t realize that as a W2 employee, your employer pays half of your Social Security and Medicare (also known as FICA tax), which is something you’d pay 100% when working as an independent contractor.  Plus, you’ll likely be eligible for a host of benefits from your employer, including healthcare, paid time off, 401K options, and other perks.

Cons Working as a W2 employee, there is a limit to how much of your business expenses you can deduct from your taxes, as well as limits to how much money you can defer to your 401K. When considering whether you want to stick with this easy employment route or take the contractor road, you also need to realize that while W2 scenarios are more convenient, you may be able to make more money as a 1099 or Corp-to-Corp contractor, even after you’ve covered taxes and other business expenses.

Becoming a W2 Contractor

Pros If you’re choosing to go the contractor route, this is the most straightforward way to go. It’s essentially the same setup as a Full Time Employee except on a temporary, contract basis. This option makes it easy for you to file taxes at tax time, and your employer will take care of withholding income taxes, and withholding and paying Social Security and Medicare. Just like a Full Time Employee, you’ll receive regular paychecks (if you’re working with a staffing firm, you’ll be paid by them), and you’ll likely be eligible for some benefits, including necessary healthcare coverage.

Cons Even though many aspects of working as a W2 contractor are similar to being a full time employee, there are a handful of downsides you may want to consider. For example, work culture-wise, it may be harder to fit into the team environment when you’re only there on a temporary basis. Plus, you may not be eligible for full benefits, such as paid time off and employer-matched 401K funds. In comparison to other contracting options, the W2 route  means you’re limited on how much income you can defer to your retirement fund, plus your pay rate will be a little lower than a 1099 or Corp-to-Corp contractor, since your employer or staffing firm has to cover the costs of payroll filing, Social Security, Medicare and unemployment taxes.

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Becoming a 1099 Contractor

Pros To become a 1099 contractor, you simply have to create an unincorporated business; essentially, this kind of business entity does not exist apart from you, meaning you don’t have to set up separate bank accounts – you and your business are one and the same. It is the simplest kind of business organization to setup or discontinue as necessary. Additionally, you are able to defer a greater amount of money to your retirement account than a W2 employer/contractor, plus you can deduct more business expenses and losses than you can as a W2. Finally, you can ask for a greater amount of pay as a 1099 contractor, since you’ll be the one covering taxes.

Cons As contractor options go, the 1099 contractor route probably has the most disadvantages. Since you and your business are one and the same entity, business liabilities also fall on you. Moreover, you’re going to need a greater amount of bookkeeping knowledge, as you’ll be responsible for paying self-employment tax, as well as income tax, Social Security and Medicare. As far as Social Security and Medicare are concerned, you’ll be responsible for the full amount – as a W2 employee or contractor, your employer actually takes care of half of it. Because you’re paying your own taxes, you must make quarterly estimated tax payments. Finally, you’ll have to cover your own benefits, including required healthcare coverage.

Becoming a Corp-to-Corp Contractor

Pros In this contractor alternative, you are creating an incorporated business of which you are the employee and which the company you’re doing work for contracts as a vendor. The huge advantage of working corpto-corp over 1099 contracting is that any liability the corporation incurs will not affect you personally. You’ll pay yourself as an employee of the business, which means you avoid any obligation to pay self-employment tax. This option also allows you to defer greater amounts of money toward any retirement accounts. Because you’ll be managing the operations and accounting for your corporation – taking that responsibility off the company you’re doing work for – you’ll be able to charge a higher pay in order to cover those expenses.

Cons The biggest downside of choosing to go corpto-corp is the sheer level of bookkeeping knowledge it takes to set up the corporation and take care of ongoing accounting responsibilities. You’ll be required to file and report payroll, pay quarterly estimated taxes, and pay income taxes, Social Security, Medicare and unemployment tax. Additionally, each state you do business in has variable taxes you may incur even if you don’t reside or set up your business in that specific state. Also, there is a minimum tax due of the corporate regardless of actual profit your business makes. You’ll be responsible for invoicing your client – the organization you’re doing work for, or the staffing company you partnered with – and, finally, you’ll be obligated to cover any mandatory healthcare coverage and other benefits. If you ever want to dissolve your corporation, it is significantly harder to do under this arrangement.

Pros and Cons to Working as a Contractor vs. Employee2

When you’re trying to decide to work as a contractor or full time employee, KORE1 can help you in the process. No matter which scenario makes sense for your career path, we have the resources and networks to help. Just contact us today.

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