Employee vs. Independent Contractor: How Does Employment Status Affect Your Pay When You Work from Home?

What's the difference between working as an employee versus an independent contractor?

When you work from home, you are generally either hired as an employee for the company you're performing services for or you're employed on a contract basis. As an employee, you are considered a W2 employee. That means all applicable taxes will be taken out of your paycheck each pay period, and you'll receive a W2 when it's time to file your annual tax return and report your income from the previous year. As an independent contractor, you are considered a 1099 contractor. That means no taxes, Social Security, etc. will be taken out of your paycheck each pay period, and you'll receive a Form 1099 when it's time to file your annual tax return and report your income from the previous year.

What does this mean to you as someone who works from home?

As a W2 employee, you'll be paid just as you would at any brick-and-mortar job location. Each time you get your paycheck, you'll see those ugly taxes deducted, and your net pay will suffer because of it. However, assuming you filled out your W4 form correctly (which is required when you're hired as a W2 employee to determine your tax withholding level), you should not be surprised with a huge tax bill come tax time. If you're a 1099 contractor, it works very differently. As a 1099 contractor, taxes are not taken out of your paycheck. Your paycheck will include the entire amount you earned. When tax time rolls around, you'll be responsible for paying those taxes that were not deducted from your paychecks. You'll report your earnings as stated on your Form 1099, and you'll likely have a balance due on your tax return.

What are the important things to remember as a 1099 contractor?

It's critical that 1099 contractors save enough money throughout the year to pay the balance due on their annual tax return in order to pay back their unpaid taxes. Typically, it is recommended that 1099 contractors save approximately 33% per paycheck to offset the balance due that they'll incur when they file their annual tax returns.

Bottom-line, the amount of money you earn will usually not change based on your status as a W2 or 1099 employee, but the amount of money you see in your paychecks and the amount of money you'll owe on your annual tax return will differ significantly. Working as a 1099 contractor doesn't have to be a disadvantage as long as you prepare financially for the inevitable tax bill you'll see when you file your annual tax return.