Should You Pick a Job With Benefits or Work as a Contractor?

Decisions about the future

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There are a million and one ways to earn a living. In today’s global market, the option to work as either an independent contractor or a hired employee can be presented when job searching and interviewing with leading companies. In an effort to reduce costs and improve productivity, a growing number of companies are outsourcing a larger portion of their former in-house jobs to freelance contractors. According to MBO Partners, the number of on-demand contractors and freelancers has grown from 15.9 million in 2011 to 17.9 million as of the end of 2014. (Source: HR Magazine, July/Aug 2015)

At some point in your career, you may be faced with the decision to accept a job with benefits or an independent contractor job that does not offer group benefits. How will you decide?

Contractor vs. Employee Benefits Decisions

Before accepting any kind of work arrangement, it’s important to understand two major things:

  1. What you have to gain professionally by this type of work agreement
  2. What your individual needs are in terms of your health and financial goals

Obviously, there are pros and cons to each type of work requirement. It’s also important to note that independent contractor jobs are not to be confused with work at home or telecommute jobs that can be actual employment relationships that offer benefits.

Working as an Independent Contractor

Independent contractors (self-employed) work under a W-9 agreement and they must supply all of their work equipment, including computers, phone, Internet service, software, and office supplies. They also pay all their own income taxes to the Internal Revenue Service and must file business returns each year.

Independent contractors may have the ability to work from their home office, on the road, or at each client’s site depending on the types of services they provide. They are required by contract to provide the work that their clients’ request, as long as they agree to the terms of the agreements, the hours of availability, and the rate of pay. Lastly, independent contractors must buy their own insurance, such as health and financial products.

The benefits of working as an independent contractor include:

  • Ability to pick and choose what types of work to perform and what industries and clients to serve
  • Choosing what work hours to be available and the environment in which work is performed
  • Earning the type of money that is related to skill sets and knowledge, not based on set salaries

Working as a Hired Employee

On the other side, hired employees are those folks who have agreed to work for an organization and are under a W-4 agreement, which enables the employer to manage both payroll and income taxes. Employees are required to work the shifts that their employer has requested, and be on the clock during these hours, whether they are hourly or salaried. They may be required to wear a uniform, safety equipment, and shoes to perform the job. They will be using the company provided computers and equipment, phones, Internet service, software, and office space or work stations.

Employees who meet certain eligibility requirements as set forth by the company and the Affordable Care Act may choose to purchase their group health and financial benefits through the employer. In some cases, all or a large portion of the premium will be covered by the employer, but with voluntary benefits the employee is 100 percent responsible to make these monthly payments. Employee benefit premiums are paid on a pre-tax basis, meaning the amount is deducted before income and Social Security taxes come out. This can be a nice cost savings by as much as 20 to 30 percent of the monthly premium.

Hired employees may also be eligible for company-sponsored benefits such as life insurance, accidental death and dismemberment insurance, short term disability, long term disability, and retirement benefit matching programs. If they choose high deductible health care plans, employees can also sign up for a Health Savings Plan to offset the costs of medically-related costs.

The benefits of working as an employee are:

  • Regular predictable schedule and salary, often with discounted employee group benefits
  • Ability to pay for selected benefits using pre-tax payroll deduction (instead of post-tax)
  • Additional workplace benefits and perks (like paid time off) that the employer pays for in full

From the above, you should be able to determine which work arrangement works best for your personal and professional needs. There may also be the option to work on a flexible basis, work from home, or take benefits as a part-time employee. Independent contractors are also sometimes offered access to some of the health insurance and voluntary benefits that employees can take, paying them out of their post-tax earnings, but at the lower group rate. Ask about this during the interview to find out what options are available to you.