Believe it or not, answering the question of whether you are an employee or an independent contractor (i.e. self-employed) isn’t as straightforward as it may seem. While for most people there’s no question, there are some instances where the lines can be blurred.
Generally speaking, if you sat down for a job interview and got hired by a company, you can probably assume you’re an employee. On the flip side, independent contractors or self-employed individuals (who are often bunched together with gig economy workers (Uber drivers, DoorDash deliverers, etc.)), generally work on their own accord.
However, things can get confusing when you sat down for the interview, get “hired”, and are still called an independent contractor. In this short piece, we’re going to clear the air on what these two types of workers refer to, what’s different between them, and what it might mean for you and your business.
“Am I an Independent Contractor?”
For a lot of people, the answer to this question is pretty straightforward. Gig economy workers are, overwhelmingly, independent contractors. Uber, Lyft, DoorDash, Grubhub, and everything in between are examples of companies that hire independent contractors to conduct business on their behalf.
Come tax time in the United States, independent contractors will receive a 1099 form from the entity that is paying them, assuming that client paid you a minimum of $600 in that year. Because you are technically self-employed, no taxes are withheld from your income, which means you will very likely be paying more in taxes by the time you file.
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In addition, independent contractors are often required to pay quarterly estimated taxes. The IRS requires this type of payment to be filed by individuals who have sources of income that are not subject to automatic withholding, such as independent contractors.
This can get muddled, however. Sometimes, you may sit down for a traditional job interview and you will be told that you will operate as an independent contractor. One of the biggest reasons why a company would do this is to avoid having to pay benefits, and even potentially avoid most federal employment statutes.
Independent contractors aren’t protected from Title VII employment discrimination requirements, aren’t entitled to benefits from the Family Medical Leave Act, the Fair Labor Standards Act, or the Americans with Disabilities Act, among others.
Independent Contractor Advantages
Self-employed workers get to take advantage of some pretty cool perks. For instance, the apparent dogma of the 9-5 work schedule doesn’t necessarily apply to you, and you’re given complete control over the direction of your work (choice of client, which food order to take, etc.).
Of course, the lack of structure presents some inherent risk compared to the relative safety of being an employee, but independent contractors often welcome these challenges. While not required, gig economy workers will frequently set up as an LLC in order to limit their legal liability and take advantage of certain tax benefits.
Independent Contractor Disadvantages
For the most part, independent contractors aren’t able to take part in company-provided employee benefits. For instance, if you’re an Uber driver, you won’t get to enroll in the company’s healthcare plan, whereas a programmer at Uber’s corporate office would.
These benefits extend to paid sick leave, vacation days, and retirement plans. As an independent contractor, you are entirely responsible to budget your earnings for these things appropriately.
In addition, you will need to have detailed records of your income come tax time as your clients (i.e. Uber if you’re an Uber driver) will not withhold federal or state taxes from your earnings. If you’re a road warrior who earns their living in their personal vehicle, tracking your mileage and expenses while working is absolutely imperative, and will save you thousands when it comes time to file your taxes.
“Am I an Employee?”
If you’re using your car to be an Uber driver, you’re self-employed. However, Uber is still a company that hires people to work in their corporate offices, doing jobs like software development, PR, marketing, etc.
While independent contractors and self-employed individuals are able to set their own hours, an employee’s schedule typically falls under the auspices of the company that they work for. If you get a W2 from the company come tax time, and you’re paid a salary or by the hour, you’re more than likely an employee.
Whereas independent contractors’ taxes are not withheld by the companies they work with, an employee’s pay stub will show that a portion of their earnings is withheld for taxes for Medicare, Social Security, and state and federal taxes.
Benefits of Being an Employee
There are two main advantages that working as an employee has over being an independent contractor; namely employee benefits and job security. Despite there not being any federal laws requiring companies to provide the same benefit coverage to all employees, there are some state-level laws, and many companies provide benefits to employees anyway as a way to attract solid talent.
In addition, working at an established company that guarantees pay week-to-week can be a huge perk for a lot of people. The freedom that comes with being an independent contractor also brings a series of risks, a major one of which being the potential for unsteady income.
Disadvantages of Being an Employee
For many people, the security and benefits of being part of an established business are what they’re looking for, but the freedom that comes with being self-employed is something that may be more enticing for others. Independent contractors have significantly more agency when it comes to who their clients are, how much they want to work, and when they want to do it.
Whether you’re self-employed or working for a company, if you use your personal vehicle to conduct company business, automatic mileage and expense tracking is an absolute must. TripLog’s automatic mileage tracking app helps save companies and their teams time, money, and stress.