The Pros and Cons of the Independent Contractor: W2 or 1099?

Most of us will spend our careers in positions with traditional compensation methods.  Salaried or hourly employees know all about punching the clock, filling out that time card and receiving those weekly paychecks with a stack of deductions for Uncle Sam.  While traditional employee positions are certainly the most common work arrangement, there may be an alternative way to bring home the dough without all the administrative red tape up front.

Freelance or independent contractor work is a typical arrangement in a variety of career paths.  In writing, some trades positions and a variety of service sectors it’s more common than not to run across positions that throw out the traditional W2.  While rules regarding what types of positions can qualify for this status vary from state to state, the distinction between employee and independent contractor when it comes to job duties and performance usually boils down to control and tools.  

Independent contractors set their own hours and terms for performing labor and will supply most if not all of the equipment needed for the position.  This work freedom is appealing to many but comes with some drawbacks and certain complicating factors as well.  From taxes to benefits, here we break down the pros and cons of accepting a position in which you’re classified as an independent contractor.

The Bad of 1099’s

Pulling off the proverbial band-aid, first, let’s cover the downsides to accepting a position as a 1099 worker or independent contractor.  As an independent contractor what you make on the job is the same amount that comes home with you at the end of the day.  There are no taxes withheld from your pay, which creates the appearance that you’re making out ahead.  If your mom ever told you there wasn’t such a thing as a free lunch, she was doubly right when it comes to independent contracts and taxes.  Taxes are still owed on the entire amount you earn as a 1099’er, they’re simply paid at the end of the year when you file your annual taxes.  In addition, employers typically have to pay a portion of these items, such as social security and medicare, but as an independent contractor, you’re responsible for this portion as well meaning you’ll end up with a higher overall taxed percentage of your take home pay.

There are other downsides in addition to the double taxation whammy.  Paid vacation is non-existent and employer funded medical insurance instead becomes self-funded.  If there’s a dispute over pay, you’re on your own for following up with the client, often in terms of an escalating series of demand letters or eventually a day in court.  When it comes to job stability, absent some other provision your client can terminate the contract at any time.  Typical protections afforded employees regarding the valid cause for firing are completely out the window and maintaining a regular work schedule is often difficult as you are left to accommodate the needs of your individual clients.

The Upside to 1099

In case you think it’s all doom and gloom, there are plenty of upsides to being classified as an independent contractor.  Fewer costs associated with utilizing 1099 work means that these workers can often command higher prices for similar skills or tasks.  While you may not have set working hours, you often have greater flexibility for making your own schedule.  If you’re motivated and able to create your own personal structure, the freedom of working independently may be just the thing for you.

There are also some tax benefits to help offset the previously mentioned downsides.  Independent contracts may be able to deduct costs associated with their jobs that typical employees wouldn’t be able to.  This includes tools, supplies, and gas or mileage for transportation to and from the worksite.  If you work from home, you may also be able to deduct a portion of your mortgage or rent as well as utilities as a home office expense.  Finally, as a 1099 worker, you may have access to additional retirement account options such as SEP-IRA’s which allow you to stash away more of your money for retirement, tax-free.

What About Employers

It isn’t only workers that need to weigh the benefits and drawbacks of 1099 status.  Employers should also be aware of how hiring an independent contractor affects their bottom line.  For starters, tax withholding is non-existent simplifying paperwork and eliminating the need to pay employee taxes.  In addition, if you hire an independent contractor you generally aren’t liable for their actions like you would be for an employee, which can be handy in the event something goes wrong over the course of the job.

On the other hand, hiring someone as 1099 often means you can exercise less control over the final work product, which can be challenging if you have strict company policies you’d like your group to adhere to.  Firing an employee for cause is generally a pretty painless action but terminating a contract of an independent contractor early could mean a day in court to sort out whether you were justified.  Flexibility on hours is also a must when working with an independent contractor.

The 1099 Bottom Line

Whether you’re looking to hire a 1099 worker or are considering picking up independent contractor work, enter into any agreement with your eyes wide open.  There are definite upsides and drawbacks and deciding on this method as a form of employment will typically come down to how flexible you are or would like to be in your profession.  If you have a desire to step outside of the traditional employer/employee mold, an independent contractor arrangement may be just the solution for you.

 

Article Updated from the Original on September 12, 2017