Employee, Freelance worker, Independent Contractor….What am I and why do I care?

Work has never been so complicated.  Do you WORK at a Company, or DO work for a Company?  While this might seem like nothing but semantics, the difference in your employment status is real and relevant in almost every way, for both you and the Companies you conduct business with.  Your classification as an employee, or a freelance worker, also known as independent contractor, determines your payment of taxes, the type of taxes you pay, you eligibility for health insurance and other benefits, and, in many cases, your very wages.

Generally, Companies love to use the services of independent contractors.  Independent contractors can work on projects as needed, no need for a full time salary.  Independent contractors need little supervision or training, they are specialized in their field.  Independent contractors are less costly than employees; there are no payroll taxes, health insurance premiums, pension plans, vacation hours, overtime, workers compensation, none of the regular administration associated with full time employees.  An employer simply pays a fee for each job and issues a 1099 statement at year-end.  And all of our modern technology easily facilitates such a working relationship.  Writers can blog, engineers can design, graphic designers can create, quality control can analyze…all from a remote location.

This is so attractive to Companies, that they often pay higher fees than they would pay an employee in wages.  It is also attractive to you:  higher pay, flexible schedule, opportunities at different companies…the benefits are certainly easy to quantify.  The downside to being an independent contractor?  You are now human resources, responsible for all your administration. You have to pay your taxes, income and employment, determine your health insurance, contribute to your retirement, and hold the necessary business insurance.  Things you never have to think about as an employee.  Where do you start?

Before even starting, there is the determination of whether or not you are an employee or an independent contractor.  It can be difficult to tell, and is often a sticky subject for Companies, federal and state governing agencies, as well as the courts.  Generally, Companies want to classify as many workers as they can as independent contractors.  Governing bodies, such as the IRS, state employment departments, state labor departments, and state income tax agencies, want to categorize as many workers as they can as employees; and workers flip flop.  They start out as independent contractors, but often change their mind, wanting the status, and benefits, of employees.  Maybe the nature of the job has changed…the scope has widened, the work is more time consuming….it is possible to become an employee after a longstanding relationship with a Company.  And there is no one set of rules for determining the relationship.  Status as an employee or independent contractor is determined by precedents set in the courts, on a case by case, fact by fact basis.  The cases are vast, and in large part, favor on the status of employee.

This seems out of step with the “work from home” society we have become.  It seems logical that in exchange for the flexibility of emailing in your pajamas, throwing in a load of laundry, running to the grocery store, coaching the soccer team, and finishing your assignment at midnight, you would not be on the payroll.   We seem capable of being our admin department.  We can turn in employment taxes, income taxes, pick a health insurance policy, carry insurance, and get a retirement plan all on our own.  Government should not need to intervene in this relationship, but perhaps it is easier for the government to keep track of our wages, and it’s own collection of those wages, if we are employees of Companies and not independent contractors.

Assuming that you are truly an independent contractor, enjoy that status, and wish to maintain it with as few complications as possible, consider the following:

1)    Get a good accountant; you will be in contact with him more than once a year.  As an independent contractor, you are responsible for self employment taxes such as Medicare and FICA, in addition to your income taxes, which need to be paid in quarterly estimates, because they will not be withheld from any paycheck.  Your accountant does not need to work for a big accounting firm, some of the best accountants are “working from home” just like you.  Your accountant needs to be abreast of the filing requirements and rates in your state.

2)    Get a good insurance agent.  What type of insurance do you need?  Errors and omission?  Workers Compensation?  Do you use an assistant?  Do they need to be covered (in addition to payroll, see accountant above)?  Liability?  Can any of this be tacked onto your homeowners insurance?  These are all questions for your local agent.

3)    Get health insurance.  This is separated from other insurance because of its significance.  Health insurance is one of the greatest concerns of the American worker, as he often relies on his employer to provide him with health care.  As an independent contractor, you are not eligible to participate in any Company health insurance plans.  This means that you if you are not covered under another person’s health insurance policy, you are without health insurance.  The government has passed health insurance reform to make insurance available to every American, however this legislation will not take shape or be enacted for some years.  In the meantime, the cost of even routine health care is too expensive to pay on your own.  You need health insurance.  It has never been easier or more affordable to get individual health insurance.

4)    Consider other benefits.  Do you have a retirement account?  Health Savings account?  529 plan?  The advisors listed above can answer these questions for you and help you navigate the possibilities of your unique situation.

5)    Re-evaluate your Company relationships annually.  Consider your status and whether you are maintaining control over your work relationship and work product.

6)    Enjoy the freedoms and benefits of being your own boss.

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