If you asked someone on the street to describe a person who works for a company, they would most likely say “employee”. That is what we generally think of when we think about the people who work for an organization. However, the common mistake that many make is assuming that everyone who works for a company is considered an employee. This is simply not true. Within a business, people can fall into several categories. For today’s conversation, we are going to focus on the difference between an employee and a contractor.

 

What Makes Someone an Employee?

 

An employee is the classification that most people get when they begin working at a company. They are hired to work either a full-time or part-time schedule. They are required to arrive and leave the building at specific times. They are given sick days, time off, and options to pay into various benefits such as healthcare and retirement. They are given a set salary and schedule as to when they will get paid and how much.

The difference between an employee and any other designation is the duration of their stay at the company. When a new hire signs an offer letter to become an employee, that employment is open-ended. In other words, there is no set end date. If both sides agree, that individual could end up working for that company for several years, if not longer. While no employee is safe from layoffs, it is arguably the safest form of employment.

 

What Makes Someone a Contractor?

 

A contractor has significant differences in their employment status. However, some of those key differences may not be noticeable right away. For example, a contractor may show up and leave at the same time as a regular employee. They may also work alongside employees on the same teams and projects. The difference lies in their benefits and the terms of their offer letter. When interviewing for a job, be sure to confirm if it is full-time employment or as a contractor.

Contractors are usually hired to cover a specific position or project. For example, if the company is going to spend the next 6-9 months rolling out a new product, they may hire a project manager to oversee the project to its completion. This person will work with the rest of the team, but their offer letter will clearly state their employment ends when the project does. Companies may decide to feel out a new position by making it a contracted one first. This allows them to eliminate the position after a certain amount of time if it doesn’t work out.

It’s All About the Taxes

 

The most important thing to understand about the difference between the two classifications is how the taxes work. As an employee, your employer takes out your taxes before you ever see your paycheck. It is basically out of sight, out of mind until tax time. As a contractor, you are responsible for paying your own taxes. This excellent article from Bench breaks down the tax differences and supplies you with several other valuable articles.

If you are going to be working as a contractor we highly suggest you consult with your accountant and ensure you are set up accordingly. As a general rule, you will want to set aside around 25% of your pay for taxes. You may end up over-saving, but it’s much better to have saved too much than too little. If you plan on doing contract work for multiple companies, we highly suggest you set up an LLC for yourself. Your accountant will walk you through all the tax benefits associated with that.

Health Benefits

 

One of the biggest reasons companies hire contractors instead of employees is to avoid paying out health benefits. If you are not covered under a spouse or family member, then you must take this into consideration when negotiating your rate. You may have been making $20 an hour at your last job, but that was before you had to pay for your own health insurance. Before accepting any position, it’s important to price out how much your insurance is going to cost you per month.

On the flip side, if you are used to paying your own taxes and benefits as a contractor, you may consider taking slightly less money to become a full-time employee. It honestly comes down to how much money you will get to take home after taxes minus any additional expenses you have to pay. As we said earlier, it’s crucial to understand if the position you are applying for offers these types of benefits.

 

Vacation Time

 

The one thing that sneaks up on contractors who are used to being an employee is no longer having paid time off. If you go away for a week, your next paycheck is going to be significantly less. The same is true if you get sick for multiple days, need to take time off to attend to a family matter, or go away on a trip. As a contractor, if you are not working, then you are not getting paid.

The key to balancing this out is to take it into account when you’re negotiating your hourly rate as a contractor. If you used to make $20 an hour, you will want to request at least $25 an hour to make up the difference. If you are planning on taking a vacation, you may want to try to pick up extra work with other companies in the weeks leading up to your trip so you can make up for the money you are going to lose.

Long-Term Security

 

The biggest difference between the two is the type of security being an employee gives you. You can be sure that your employment will not end when your project does. You can also feel comfortable knowing the company is investing in your growth and sees you as a part of their long-term future. A contractor might not be able to say the same thing. Most contractors have a set end date on their offer letters.

Now, it is possible that a full-time, long-term engagement is not what you are looking for. If you are comfortable working for a different company for a few months here and there, then you should highly consider becoming a contractor instead of an employee. Perhaps your goal is to apply your skill set to several companies at once instead of being stuck with just one. Only you can answer that question for yourself.

 

Conclusion

It is tough to say which is better, being an employee or a contractor. For many, the idea of having paid vacation time and an open-ended employment is exactly what they are looking for. However, it is possible you are looking to build a book of clients and apply your trade across many companies instead of being pigeonholed to just one. Regardless of which path you choose, be sure to always understand what type of position you are applying to every time.

 

Let’s Talk

 

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