Is being a contractor or an employee better?

Some like the security of being an employee, but may be leaving freedom and money on the table

Dear Money Lady: I have been offered a new job as a contractor and I am not sure if I should take it. Could you tell me what the difference is between an employee versus a contractor. — Thanks, Jenn. Dear Jenn: Great question — one that most people should know!

Most Canadians, if given the chance to take a contracted position over an employee position will always choose the employee placement, thinking it is more secure and better than being labelled an independent contractor. This is a false notion, one that always leaves a lot of money on the table. Longtime contracted Canadians know the benefits of this employment choice and often would never opt to go back to a so-called coveted employee position.

So, let’s discuss the differences and you can choose for yourself which is better.

The main difference between an employee and an independent contractor is the taxation, deductions and benefits. As a contractor, you will be responsible for paying your own taxation and CPP (Canada Pension Plan) and, because you are not an employee, you most likely will not have any health or dental benefits. Because of this, contractors are always paid more than employees and often have a lot more freedoms.

Contractors can work for many different clients or companies, they have less restrictions and are usually free to perform their duties the way they want to, provided the contracted work is completed within the time frame agreed upon. They are always paid without deductions, so it is necessary for a contractor to budget for taxation and set up a savings strategy for retirement.

Personally, I have been an independent contractor since I was 22 and I would never go back to an employment position. As a contractor, you are always paid more and have the ability to write off personal expenses to reduce your overall income. Cell phone fees, car expenses (gas, mileage, depreciation or lease payments), home office, stationery and office expenses, equipment, gifts, meals and entertainment are just a few of the write-offs most contractors use to lower their taxable income.

In my opinion, it is your take-home earnings that matter most. Someone who earns a six-figure income, but is taxed at the highest marginal tax rate and then has multiple deductions off their pay, is far worse off than a contractor that makes less but takes home more.

As an employee, you normally do not have the opportunity to profit from your work. You would not need to make any investment into performing your job other than showing up and providing the services required by the employer. You are entitled to benefit plans, along with group health and dental insurance. All required deductions and taxation will be calculated by your employer and you will receive your net income in the form of a regular pay cheque.

Most people believe that, as an employee, you are safer than a contractor, with more job stability. This, however, may not be true, since anyone who is not doing their job runs the risk of being fired.

Many industries today don’t have contracted positions. However, if you have the opportunity to try it in your working career, you should. You may find, like myself, that you never want to go back to an employee position ever again.

Good Luck & Best Wishes,