Should I be an Independent Contractor or an Employee? What’s better? How do I choose?
These questions arise (or the decision is made for you) when you start a new gig. For most workers, the answer is simple; you’re an Employee. The good news about this arrangement (from a tax perspective) is that as an Employee, the Employer manages and administrates your portion of the taxes including Federal and State taxes withheld, and Social Security and Medicare (FICA) withheld (your Employer matches your FICA). At the end of the year you receive a W-2.
The downside is that your Employer controls your schedule and decides what work you have to perform in your job. The other downside is that any business related expenses you incur that are not reimbursed are not tax deductible. This can really hurt money-wise especially if you have a home office, use your car to perform your job, or entertain clients. The remedy? have an understanding before you start your job as to “if” and “how” you’ll be reimbursed for your business expenses. If the employer isn’t offering to reimburse you, then you need to negotiate your salary in order to cover your unreimbursed expenses.
An Independent Contractor on the other hand, may be a better fit for a lot of workers; you have much more flexibility on the type of work you do, the manner you perform this work , and when you want to work. An Independent Contractor (IC) normally receives a 1099 at the end of the year and is responsible for all the tax aspects of work performed, monies received and expenses associated with their work. The great news here is that there are MANY expenses that you can consider as deductions on your tax returns. These deductions include: Office in the Home, Auto and Truck Expenses, Office Supplies, Internet Connection, Business Meals and Entertainment, Health Insurance, Tax Preparation fees, and the list goes on and on.
It’s important to track your expenses throughout the year so you don’t have to scramble when you’re preparing your tax returns.
Here’s the downside of being an IC. First; you’re responsible for all tax aspects. Which means that there is no Federal or State taxes withheld, and there is an extra tax, called “Self Employment Tax” (SE Tax) that is assessed at 15.3% on the net income from these types of earnings! That’s right, folks this tax is over and above income tax. SE Tax was designed to be both the Employee AND the Employer portions of the Social Security and Medicare Tax. So being your own boss means that you wear both hats and have to pay both halves of the SS and Medicare. The positive side of this tax is that it’s assessed on the NET Income from your business. That’s why it’s important to keep track of your expenses.
Need help? Call me anytime, I’m here to serve you ~Anthony Imbimbo, CPA 619-497-1040