As a remote professional, it’s important to understand the differences between working as a contractor and an employee. There are various employment and tax implications of each option, as well as compliance risks that the hiring company should be aware of.
Should I be a contractor or an employee?
The answer to this question will initially revolve around personal preferences and the market for your skills.
Contractor gigs are relatively easy to find on various platforms while securing an employee role requires more time and effort. Some remote professionals may value the independence of a contractor role, while others prefer more stability and benefits as an employee. The question is which one is better than the other for your personal circumstances, and what the pros and cons are of each.
What is a contractor?
As a contractor, you are self-employed and enjoy a certain amount of autonomy as long as you complete assigned projects or hours. Sometimes an individual can be hired more easily and quickly as a contractor, as the hiring company does not have to make any long-term commitment or meet certain employment requirements.
Pros and cons of working as a contractor
Pros:
- Full autonomy in selecting project parameters and allowed to work with multiple companies at one time
- Flexibility to set own schedule and work methods to complete projects and meet deadline
- More control over payment amount and contract terms
- Access to more tax deductions for business expenses
Cons:
- Contracts and income can change at any time
- No benefits, allowances, or expenses are paid by the company
- Must withhold and pay your own taxes at regular intervals
- Less integration with company culture
What is an employee?
As an employee, you work within a much more structured environment, even as a remote team member. For some remote professionals, this has a certain appeal, especially if they have been operating under the uncertainty of a contractor status for a while.
Pros and cons of working as an employee
Pros:
- Constant monthly salary and benefits
- Defined role and work responsibilities
- Access to employee entitlements and labor rights
- A feeling of greater integration in the company’s culture
Cons:
- Must follow work parameters, schedule, and assigned role
- May need to be available at unusual hours, especially on a distributed team
- Not possible to work with multiple companies or clients
Cost considerations as a contractor or full-time employee
There are many differences between full-time contractors and full-time employees. If you’re considering becoming either, remember that both of these choices have benefits and drawbacks. According to the United States Internal Revenue Service, these positives and negatives relate to the behavior, finances, and relationship of the work being performed.
Making income
The choice between earning income as a contractor or a full-time employee comes down to risk and reward. For employees, being on the payroll of a healthy business means having consistent, steady income over time, with the opportunity for pay raises and bonuses and minimal risk of income loss.
For contractors, the primary way to maintain consistent earnings is networking, seeking out new business, and competing for contracts. By leveraging experience to bid on higher-paying roles, a contractor might be able to outearn salaried employees of equal expertise. Of course, the risks of business drying up or demand slowing down are always present.
Getting benefits
When choosing to work as a contractor or an employee, benefits are a key deciding factor. This is especially true in the U.S., where affording healthcare is a concern. For employees, joining a company that offers benefits is a guaranteed way to get low-cost health insurance, retirement investment contributions, life insurance protections, paid vacations, and more.
For individuals who have chronic illnesses or require medical care, full-time positions are the best option for maintaining health coverage. But for contract roles, benefits aren’t usually included. This means that contractors must secure their own healthcare, life insurance, retirement fund, and “paid time off” compensation.
Paying taxes
When it comes to paying taxes, both contractors and employees must find a way to calculate their tax obligations. For employees, this usually involves getting a tax statement from an employer. This tax statement, like Form W-2 in the U.S., details the income earned and taxes withheld. From here, employees can file and prepare taxes using a professional tax service, software, or a trusty calculator.
Contractors have a more complicated process. Because contractors are not part of a company payroll system, they must track all income, calculate the correct taxes owed, and then save this portion for when tax season rolls around. From here, contractors must file a Schedule C Form 1040 to report all tax information. Fortunately, there are many free and subscription-based software designed to help contractors keep track of taxes.
Other costs
- Time and scheduling. One of the biggest positives of contract work revolves around being able to design one’s own schedule. However, this benefit can become a negative, depending on how many contracts are in place. Certain contract projects may require more attention and time, making balancing the workload complicated. Compared to employees, contractors must be able to independently create and maintain productive working hours.
- Training and education. Contract roles can be useful for building experience and expertise over time, but companies are looking for expert help right away in many cases. A contractor must invest in their own training and education to maintain a competitive advantage. While employees may be allowed to receive or request paid training, contractors must find their own learning. Beyond free educational tools, online courses, certificate classes, workshops, and seminars can be costly.
- Collaboration and support. By being under contract and self-employed, an individual does not have the same support as an employee. This support system includes having HR and legal departments, plus benefits, health insurance, pay raises, and bonuses. Instead, contractors must be completely self-reliant in finding more work and funding their own support systems for legal, accounting, insurance, and retirement.
What happens if I am misclassified by my employer?
The work status of a contractor or employee is controlled by government regulations in the country where the work is performed. When it comes to contracting, there is the possibility of being misclassified.
If as a contractor you are treated like an employee, such as getting paid set amounts at regular intervals and the company controlling your work methods, the company will be subject to misclassification risk. This means that you could be reclassified as an employee, regardless of any contracting agreement between you and the company. This is more of a burden for the employer as they would become liable for taxes, benefits, and additional fines.
Stay compliant as a remote contractor or employee
As a remote contractor or employee located abroad, you will have to follow the foreign country’s labor, employment, and tax laws. Navigating compliance risks and worker classifications is complicated and constantly evolving.
In order to stay compliant while working remotely, many remote contractors, employees, and companies partner with an employer of record (EOR) or use a contractor management solution. These options mitigate risk on both sides of the employment arrangement and streamline onboarding, employment, contractor payments, and taxes.
Velocity Global and our global partner network simplify employment in 185+ countries. Contact us to learn more.
