As the gig economy continues to grow, more and more people are considering self-employment as a viable career option. But when it comes to taxes and legal status, there are some key differences between being self-employed and being a contractor. In this article, we`ll explore those differences and help you decide which option is best for you.
Defining Self-Employment and Contracting
Before we dive into the differences, let`s first define what we mean by self-employment and contracting.
Self-employment refers to working for yourself and running your own business. This could include freelancing for clients, selling products or services, or running a small business.
Contracting refers to working for a company under a contract or agreement. As a contractor, you`re typically hired for a specific project or period of time, and you`re paid for your services on a per-project or hourly basis. Contractors can work independently or be employed by a staffing agency or consulting firm.
1. Legal status
One of the biggest differences between self-employment and contracting is the legal status of the worker. As a self-employed individual, you are responsible for registering your business and obtaining any necessary permits or licenses. You may also need to file for a tax ID number and collect sales tax if you`re selling products. As a contractor, you are typically considered an employee of the company you`re working for and don`t need to worry about these legal requirements.
Another major difference is how taxes are handled. As a self-employed individual, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes (known as self-employment tax). You will also need to file quarterly estimated tax payments. As a contractor, your taxes are typically withheld from your paycheck by the company you`re working for, just like a regular employee.
As a self-employed individual, you`re responsible for providing your own benefits, such as health insurance, retirement savings, and paid time off. Contractors may also be responsible for their own benefits, depending on the terms of the contract. However, some companies offer benefits to contractors, such as access to their health insurance plan, which can be a major perk.
4. Job security
As a self-employed individual, your income and job security are largely dependent on your ability to find and retain clients. If you`re unable to secure enough work, you may struggle financially. As a contractor, you typically have a defined period of work and are paid for the work you complete. However, once the project is over, you may need to find a new contract to continue earning income.
Which is right for you?
Deciding whether to pursue self-employment or contracting depends largely on your personal preferences and goals. If you`re looking for more job security and the benefits of being an employee, contracting may be the better option for you. However, if you want more control over your work and the ability to set your own rates and schedule, self-employment may be a better fit.
Ultimately, the key to success in either path is to do your research and understand the legal and tax implications of your choices. By doing so, you`ll be better equipped to make an informed decision and set yourself up for success as a self-employed individual or contractor.