Is It Better to Be a Freelancer or Full-time Employee?
My husband works for a company as a consultant. He’s a contractor but I want to understand the benefits and disadvantages of that kind of arrangement compared to being a full-time employee. Also, are there ways you can suggest he could parlay his consulting experience into a full-time role at the company or a competitor?
Contractors usually fill a temporary need for specific talent or skills needed for a short amount of time -- for a specific project, for example. They are supposed to be very temporary, have their own place of business and work for other entities.
Most of the advantages of using a contractor (i.e., 1099 worker) fall squarely on the side of the business entity. That is because contractors are not eligible for any welfare benefits such as medical or other insurance, paid time off work, and so forth. Also, contractors are responsible for taking care of their own taxes, with no amounts being deducted or paid by the business entity for social security, unemployment, etc. And, of course, when contractors are let go, they are not eligible for unemployment benefits.
Some people like contracting because they receive more money directly (due to no tax deductions being made to their pay); but many do not for the reasons stated above and because they can owe a sizable amount for income taxes at year’s end if they were not paying estimated taxes quarterly throughout the year.
There are quite strict laws regarding the definition of a contractor versus an employee because companies like to skirt paying payroll taxes when they can. As a general rule, business entities using contractors -- legitimately or otherwise -- have little incentive to convert them to full-time employees, as doing that gives the worker rights under employment laws and increases the costs by 25 percent to 33 percent or so for each such conversion. On the other hand, if your husband proves to be a consistent and valuable addition to a business entity’s team, they might make the conversion, regardless of the increased cost.
If you look at Section Two of the IRS Publication 15-A, you will see exactly what the IRS considers when determining whether a worker is an employee or an independent contractor (i.e., 1099 worker).
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