Employee or Independent Contractor — What Are the Costs?

by Ray and Paul

Do you work as an independent contractor?  As an employee?  If you’re paid on an hourly basis at the same rate, you’ll get a bigger weekly paycheck as an independent contractor.   But what are your costs, and what difference does it make to your net income over the course of a year?  We wanted to find out.  Here are examples for 3 individuals: someone who works exclusively as an independent contractor, a full-time employee, and a freelancer who earns some income as an independent contractor and some as a part time employee, perhaps at multiple employers.  Some costs will be the same for all 3 individuals, others will vary by classification.

This chart is organized similarly to a tax return and is based on the new tax law.  Each person earns $50,000 per year.  The independent contractor’s expenses include liability insurance to replace a protection that comes automatically with being an employee, even though some people who work as independent contractors go without it.  The full time employee paid part of the cost of employer-provided group health care.  Other items may apply to both but are deductible on taxes for only one.  Some (groceries, rent) don’t get included on an actual tax return, but we’ve listed them because you do pay them, and they do reduce your available money for the year.
Note that we aren’t considering the question of what your classification should be.  That’s a topic for the previous article.

1 Comment

  1. I was confused for several minutes about this sentence: “If you’re paid on an hourly basis at the same rate, you’ll get a bigger weekly paycheck as an independent contractor,” trying to figure out how an IC makes more money. I finally realized you were referring to NET, not Gross. This to me is one of the greatest misconceptions in this business: that the net paycheck is what you made, that it’s better to have the money now, and that ICs make more money and have better tax advantages. Perusing your chart well illuminates that this is erroneous, but a summing up paragraph at the end explaining this in plain language would probably be useful. Also, calling it a “bigger weekly paycheck” only perpetuates this flawed understanding. Inserting the term “net” wherever possible will help rectify this, as in “bigger weekly net paycheck.”

    Further, this all leaves out one very important fact: that at tax time, the IC will owe the full $10K or so of taxes, and needs to have saved accordingly, while the employee will owe nothing.

    And can you please add dates to all blog posts? Not knowing when things are written removes one of the most relevant contexts when reading most anything, especially information like this.

    Like

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