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Employee vs. Self Employed: Criteria and Considerations

Guest post by: ronika khanna

Article Overview: For the majority of income earners, employment status is pretty evident. If you are going to the same place every day, have an assigned cubicle with a computer and corporate stapler, and your boss tells you what you need to do, chances are you are an employee. Conversely if you have several clients, use your own laptop, and are worried about where your next sale is going to come from, you are probably self employed.

Employee vs. Self Employed: Criteria and Considerations

For the majority of income earners, employment status is pretty evident. If you are going to the same place every day, have an assigned cubicle with a computer and corporate stapler, and your boss tells you what you need to do, chances are you are an employee. Conversely if you have several clients, use your own laptop, and are worried about where your next sale is going to come from, you are probably self employed. There are, however, some workers whose status is not that apparent. For example you may work from home and use your own computer, but you report to one entity, who supervises your work. In these cases a determination needs to be made as to whether you are an employee or self employed. It is not enough for the person paying you to determine your classification ; often, payers are biased as they may not want to take on the financial costs and responsibilities of having an employee (explained below). As such, when in doubt about your status, it is helpful to answer the following questions:

* Do you have control over how the work is done?

* Do you more than one "client"?

* Are you allowed to have other clients without permission?

* Can you decline to do work?

* Do you provide your own tools and equipment?

* Do you market yourself?

* Can you hire someone else to do the work?

* Do you bear the risk and responsibility for the work done i.e. if it is not done properly will you get paid?

* Is there a written contract detailing the terms and conditions of the work?

If you answer yes to most of these questions, then you are most likely self employed.

So, why should you care about what category you fall under? There are actually several differences that, when faced with a choice between being and employee or an independent, are important to understand:

* An employee often has certain entitlements including laws against wrongful dismissal;vacation and severance pay and other perks including company contributions to health insurance, pension and life insurance plans. The self employed have to bear these risks and costs on their own.

* In addition to calculating collecting and remitting employee payroll taxes, employers are required to pay additional taxes for their employees. Self employed individuals are responsible for calculating and remitting their own taxes.

* Employees are entitled to employment insurance benefits whereas self employed people, if eligible at all, are subject to different contributions rates and benefits.

* The self employed are allowed to claim certain business related deductions against their income including home office, automobile and telephone expenses, thereby reducing their income taxes. Employees are not.

* If is often easier for employees to get loans, mortgages and credit cards as they are perceived as having greater income stability. Self employed workers often have uneven income streams and greater risk of collection which can impact negatively on their ability to get credit.

Although, there is more effort, risk and responsibility that goes along with being self employed, there is also greater control, potential for profit and flexibility. An employee on the other hand enjoys more stability (although the current unemployment rate may not exactly support this) and has much less to do in the way of administration, but does not have as much leeway in terms of what he or she earns.

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Article Tags: independent contractor, self employed, self employment, small business



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