We all want to be bosses, but in reality, most of us are workers. Let us say you have or soon will be crossing the bridge from Employee-land to Owners-grove. Once on the other side, you have to hire a workforce. Will your workforce be comprised of employees, independent contractors, or both? Before you can decide, you need to have a clear understanding of the differences between the two and why one may be more suitable for your business.
W2 Employee - A business hires an employee under an employment agreement. That business then withholds the taxes, pays their employment taxes for them, and may provide training and benefits. As a result, the business dictates what they work on and when they work. Thus, having more control over the employee.
1099 Contractor - An independent contractor is self-employed. A business enters into a contract with an independent contractor to perform a specific task. Since contractors are self-employed, taxes are not withheld from the paycheck. Also, contractors pay their payroll taxes and provide their benefits.
Business Pros
W2 Employee Independent Contractor
Loyalty - Seek an identity Expertise - Typically well trained
Greater Control - Schedule Flexibility / Independence
Business Cons
W2 Employee Independent Contractor
Higher expense - Provide benefits Less control
Managing employees Legal considerations
Now, if you still reside in Employee-land like most of us, this information can be very beneficial to you. Businesses will always do what is best for their bottom line. Likewise, you need to do what is best for you. Generally, there is a more comprehensive understanding of W2 employees than 1099 contractors. However, beyond the shadows of the uncertainty of a 1099 contractor lies hidden benefits.
Let's look at annual income taxes paid by employees and contractors. According to Moneywise.com, an average salary of $100,000 is reduced to the take-home pay of $70,000. The other 30% goes to--you guessed it. Taxes.
For independent contractors, Bench.co reports self-employment taxes on the same $100,000 would be $14,000. Resulting in take-home pay of $86,000. That is $16,000 more than the W2 employee. But that is not the good part! You can save even more money at tax time.
Instead of paying taxes on the $100,000 you earned, as a self-employed individual, you only pay taxes on your net earnings. This is calculated by subtracting your business expenses from your business revenue. Here are examples of expenses that can be deducted from your business revenue. They include operating expenses, supplies, home office, business insurance, business entertainment, travel, child care, cleaning services, car-related expenses, mileage, cell phone cost, utilities, interest(mortgage), even snacks and coffee. If these expenses totaled $10K, $20K, or even $30K. Your tax burden would be that much less! You could even get a tax refund. Imaging ending the tax year with a net income of more than you earned.
Of course, the above example is simplified, but it clearly illustrates the potential of being self-employed.
Don't believe me...click on the picture below and see how this young man feels about taxes.
Below are a few references to further expand on this topic.