#topic-career-advice
Present information about each employment-type classification to help you make a decision about which path may be best for you.
This is not official tax guidance and should not be taken as such. The intent is to present information about each different employment relationship type which are common in tech industry. The reader should do their own research and come to their own conclusions about the affects of each option.
It's my hope that this write up with present you with information that will help you make a decision about which types of employment will best suit your situation, needs and wants. With that said, we simply wont be able to cover every topic here that is sure to arise; please use discretion and find the option that works best for you with your own research.
Contractor
A contractor is a person or company that performs work on a contract basis. 1
Contract to Hire
Contract-to-Hire agreements outline a set length of time a contractor will work for the employer. At the end of that set period, the employer decides if the contractor will be hired as a permanent employee or dismiss the contractor. 2
Full Time Employee
Under the common-law test, an employee is a worker whose work process and work product are controlled by the employer. 3
- Contractor
- Pros
- Freedom. You decide when, where and how you work. If you cannot decide this, you may be improperly classified as a contractor when you are in fact an employee. 4
- Allowed additional itemized deductions when filing income taxes. 5
- You're paid for hours worked (no exempt pay in contracting!) and get that on your paycheck.
- You decide how and what to set aside for taxes.
- Generally retain rights for creation of intellectual property.
- Cons
- Additional administrative burden in keeping track of hours worked, business-related expenses for tax deductions, and tax payments that will need to be made (income tax, employment tax, etc...).
- Generally no benefits (health, retirement) packaged in term of contract work.
- Pay an additional 7.65% of employment taxes (FICA) that would otherwise be paid by the employer.
- Consistently sell new work.
- Pros
- Contract-to-Hire
- Pros
- Opportunity to "try out" the company.
- Many C2H opportunities which can give a diverse background.
- Cons
- Difficulty in comparing the contract rate versus salary at hire point.
- Less emotional investment.
- Financial and Career risk if fit doesn't occur.
- Pros
- Employee
- Pros
- Only pay employee portion of FICA, Medicare.
- Easier to obtain benefits via company than as an independent contractor (often better/cheaper too).
- Expectation of consistent work, as opposed to having to find your own as a contractor.
- Cons
- Your employer controls what you do, how you do it, and when you do it.
- Cannot deduct reimbursed business expenses on tax returns.
- Intellectual property created is generally property of the employer.
- Pros
Rules of thumb
Double the hourly rate and add three zeroes for an annual salary equivalent. $50/hour -> $100k. Caveat: doesn’t include health insurance or time off.
Consider the invisible benefits of employment when considering contract work such as health care, paid time off, retirement matching etc...
| Topic | Contractor | Contract-to-Hire | Employee |
|---|---|---|---|
| Take-Home Formula | {HourlyRate} * {Hours(2080)} * (1 - {Effective Tax Rate} - {Social Security Rate} - {Medicare Rate}) - OtherBenefits{Healthcare,Retirement,Etc...} | Depends on Income Stub below | {Salary} * (1 - {Effective Tax Rate}) - {Healthcare Premiums} - {Retirement Contributions} |
| Tax Income Stub | 1099 | 1099 (if not hired during tax year) or W2 (if hired during tax year) | W2 |