When most professionals are ready to change their employment situation, their employment classification isn’t their primary concern. However, while wages and potential projects are better daydream fodder, the type of employment you choose now influences your technical skill maturity, professional growth, and career satisfaction in the future.
So which employment option is best for you? Finding the right answer is difficult enough without the variability of new legislation and wavering economic conditions. Add the abundance of questions that already exist about the nature and responsibilities involved with being a contractor versus a full-time employee, and you have numerous elements to wade through. 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.
Dangers of Becoming 1099 Contractor or Corp-to-Corp Contractor
In the past, 1099 contractor and corp-to-corp contractor classifications allowed professionals additional avenues to earn a living from their technical skills. People could gain greater autonomy and control of their work schedule and practices by assuming varying responsibilities and liabilities for their taxes, healthcare coverage, and other benefits. Yet recent legislative changes have undermined the viability of these two independent employment categories.
California’s new assembly bill AB5 now require companies to prove three conditions without a doubt if they are going to classify any member of their workforce as an independent contractor:
- The independent contractor is performing services without the control or direction of the company.
- All work must fall outside of the usual course of business for the company.
- The independent contractor is engaged in an independently established trade, occupation, or business.
Companies that misclassify individuals as independent contractors that fall within the above criteria risk paying penalties that can range up to $25,000 per violation in addition to back taxes and benefits. As a result, 1099 opportunities might dry up in some cases or force employees to incorporate to maintain the relationship.
Unfortunately, even that adaptation is fraught with problems. The IRS is applying greater scrutiny of individuals who adopt a corp-to-corp contracting model, searching to limit tax breaks. Moreover, the process of incorporating can be difficult to organize, complicated to eventually dissolve, and require you to pay some state taxes even if you make no profits through corp-to-corp arrangements for a given year.
Deciding between contracting and full time employment is no easy task, especially with ongoing changes to employment law. Reach out to a KORE1 team member today to discuss your options and which is the best fit for you.