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From what I understand full time employees get things like vacation, health insurance, dental and retirement.

Are there any other important differences?

closed as not constructive by yoozer8, Oded, yannis, Jim G., jcmeloni Sep 20 '12 at 1:57

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    Please focus the question to a locale - We are already getting answers distinguishing themselves by being from different countries, which will end up making this a poll :( – Oded Sep 18 '12 at 10:14
  • I added a united States tag based on the location in your profile; hopefully that's correct? – Rarity Sep 18 '12 at 13:34
  • Yes I am in California if that helps – Brh Sep 18 '12 at 14:56
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(Disclaimer: US-centric answer)

From a purely financial standpoint, realize there are multiple differences that add up to a substantial gap in the after-tax value of your nominal rate of pay.

  • as a self-employed contractor, you pay both halves of the Social Security and Medicare taxes (in 2012 that's an extra 7.65% over what you'd pay as an employee)
  • no paid vacation/sick days
  • no paid holidays (varies by employer, but in 2012 there were 10 official Federal holidays)
  • no benefits such as health/dental insurance, life insurance
  • no 401K matching (seems like this one is overlooked; it can be a huge bump to your effective salary, as any match is essentially bonus money, and grows tax-free)

You can quantify the cumulative impact of these differences depending on what a "normal" amount of PTO and benefits looks like in your line of work. The effective take-home pay cut for moving from full to contract position at the same nominal rate:

  • even if you get one week's vacation and five paid holidays, with no benefits, that would be a 12% hit.
  • if you're getting a combined 4 weeks vacation/PTO, with good health benefits, then you might be looking at a 20% hit or more.

The amount you lose due to the above factors can be mitigated by writing off some of your income as business expenses; these can include equipment purchases used for business (laptop, cell phone, office supplies), or even part of your rent/mortgage if you keep space for a home office. But realistically, this amount may not be much; even if you're able to write off $5K in expenses, that will only translate to maybe $2K less in taxes.

The take-home message is to either ask for more money as a contractor, or expect to take a paycut.

  • Remember, that contractors can work at multiple companies semi-simultaneously. Mondays Wednesdays and Thursdays at company A, Tuesdays and Fridays at company B. That's 2 places paying you, and if you get your contracts right, they shouldn't be paying you by the hour, but instead in a salaried manner. – acolyte Sep 18 '12 at 13:42
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    This answer is for freelance, 1099, consultant/contractors. You can also work as a W2 contractor through an agency. In that case, your tax implications are the same as an employee's. You probably won't get paid vacation/holidays. Benefits will vary. Some agencies offer roughly the same benefits (health, 401K, etc) as a regular employer and others don't provide anything. – jfrankcarr Sep 19 '12 at 1:48
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(My answer assumes you're in the US in an at-will employment state, for the most part).

Although any company will likely drop an employee in a heartbeat of their profitability is at stake, most companies will consider you more disposable if you're there on a contract basis.

Many of them have been burned by ignoring or misunderstanding IRS regulations distinguishing between independent contractors (or agency temps) and full time hires, so you may find that they erect artificial barriers, like not allowing you to participate in team morale events, for the purpose of real or perceived compliance with worker classification rules.

If you're an agency temporary or independent contractor, the justification for your presence is typically a project, not a team. If the project is canceled, you may be gone, even if the team remains organizationally intact. On the other hand, a project could in some cases be more important than the sponsoring team; I've worked on at least one project as a contractor that survived various forms of organizational turmoil because the project was considered a key business initiative.

Many companies are not particularly well equipped to handle the needs of managing contractors; card keys, access to various systems, and so on may have convoluted or chaotic processes for which approvals are either less clear, less systematic or less simple than the equivalent needs of a full time employee.

Most likely, assuming you're using office space at the client's site, a contractor will be lower in the hierarchy for obtaining space, even when it's in the company's best interest to make sure you have what you need. You're more likely to be a pawn or fall guy for internal political struggles. Your performance may be judged more harshly than that of a regular company employee.

Unless it's in your charter as a contractor to make some waves, you may be expected to merely accept organizational standards (and flaws) and cope with them, rather than drive initiatives to fix them.

On the other hand, if you're at a company with internal leadership challenges, there's a chance that, as a contractor, you'll be seen as more of an expert in your domain than the direct, regular employees working in the same area. People may lean on you for advice that they wouldn't trust their employees with, because of the organizational anti-pattern of empire-building that many dysfunctional organizations suffer from.

It's often more advantageous to be a contractor if you're in an organization with leadership challenges, as long as you're capable of rolling with the punches of internal drama while maintaining a fairly professional demeanor.

Also, if you're in an independent contractor arrangement, or subcontracting, you will likely have to do more paperwork when it comes to your taxes, including filing estimated taxes, paying a higher share of the Social Security and Medicare taxes, and so on. Unless the company you establish pays into the unemployment insurance system that your state offers, you may not be eligible for unemployment if the contract ends. (Working for a temporary agency as a W2 employee mitigates this risk, generally at the cost of a lower take home pay). The upside is that many expenses related to operating as an independent contractor can be deducted from your taxes as a business expense, rather than requiring itemization.

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In the US companies have been caught and fined for trying to classify people as contractors when they should be employees. It is not based on banning contractors from team building but based on how they control your location and schedule of work. If they say you must sit at this desk, during core hours, and attend these daily meetings then they should be paying you like an employee.

Regarding pay. You will get X$ for every hour you can bill. You have to fund everything else from that money: Salary, sick, vacation, holidays, insurance, retirement, self-employment Social security tax, regular social security and medicare. Remember that the typical employer either covers these amounts in whole or in part. They will pay you more per hour worked as a contractor, but their actual costs will be lower because these hidden costs are eliminated.

In the US a rule of thumb is that the fully burdened rate for a employee is 1.75 to 2.25 times their salary. The fully burdened rate includes salary, benefits, overhead and profits.

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Canadian Answer:

Similar to other locales full-time employees get paid vacation (standard is 2-3 weeks / year), dental coverage, and a few other insurances, as well as companies participate in pension plan contributions for you.

Typically if you work contract you have to be incorporated. This involves a hefty amount of accounting and reputable shops charge annual rates of $800 - $1400 (Toronto prices). You also have to pay for all of the above yourself.

The upside of contracting is much higher rates. For example a typical J2EE developer position that might offer 85K/Year full time will be $65-$70/hour contract. Over a 52 week period that comes to $120K+. In addition, there are a lot of taxable expenses that you can take advantage of thus paying a lower marginal tax rate as well as chosing to pay yourelf in the form of dividends rather than salary (again, lower tax rate).

From a strictly financial point of view, being a contractor is a better way to go. There are considerations like work stability/job security, possibility of promotions, etc that one should keep in mind.

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To me the other main differences include the followings. Please note my answer is based on New Zealand labor market and business system (it should not be that different to other countries though).

There are several types of contractors and they differ from full timers in different ways:

  1. External individual consultants.

    They are usually experts hired to solve some problems or do some projects. They are paid by hour. They are expected to bill for researches done, but not time spent on general study (e.g. a company may allow full timers 2 hours each day on learning, but not expect contracts to do the same, unless it is research required to solve the specific problem faced). Their notice periods are also generally shorter than full timers, depending on the nature of the problems / projects. They may be allowed to provide professional services to multiple clients at a time.

  2. External company consultants.

    Their companies are contracted to provide services. The relationship between the consultants and the hiring company is company to company, rather than individual to company, meaning that their work may need to meet some industrial standards expected to be met by a full-blown business entity. They can usually claim their costs such as laptop, transportation, and telecommunication as business costs for taxation purposes. A contractor company with multiple contractors usually service multiple clients at a time, and may even subcontract works.

  3. Average worker on temporary / short year contracts, usually ranging from a couple of months to 2 years.

    They are called contractors only because there is a specific end date on their employment contracts. They are generally the same as full timers, but may not receive some benefits (depending on the company) due to their limited time of service and commitment. However some companies offer some benefits not shared by full timers to prevent such contractors from looking for full time jobs elsewhere, for example, a bonus at the end of the contract, or a higher rate if the contract is renewed.

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