Nov
12
W-2 Contractor: An Oxymoron
November 12, 2009 | Comments Off
W-2 and Contractor or Consultant should not appear on the same sentence, it is an oxymoron. W-2 forms are given to employees, as defined by the IRS. Employees have certain rights and duties. Employers retain taxes from them and may be obliged to give them some benefits in some states or localities. Normally consultants/contractors don’t work for only one customer for a long period, and they have a leeway into how they perform their tasks. They also buy their own equipment. The fact that they append the term “Contractor” or “Independent Consultant” to the job posting that also says it is a W-2 positions is just because they want to give you a clear impression that it is a temporary engagement (6 months, for example), and that after that term there is no sure employment.
There is nothing wrong with a W-2 positions. With the high unemployment rate we have, any work opportunity is a good opportunity. Don’t be discouraged by it. However, don’t be falsely encouraged to think you have achieved independence if at the end of the year you get a W-2.
Professional independence comes with risks and rewards, but normally it requires:
- Subject Matter Expert - You are the one who knows how to complete a task – that is why they hire you and not just anyone on the street. You have spent years training yourself, sometimes at your own expense or your own time. You have done the task several times, in different situations, for many customers. You are the right choice – or the only choice – for this kind of task.
- You Have the Tools - You have the tools to accomplish the job. Tools can be physical ones as in hardware, or they could be proprietary intelligence that you use to accelerate your deliverables. Either way, they need your skillset and your toolset.
- You Have Risks and Rewards - You have the chance for profit or loss. On a W-2 you only have profit for your time, albeit it may be adjusted to reflect the risk is being carried by an employer. There are many reasons why a 1099 contractor may get paid better than an employee – sometimes double – or even more. As a consultant/contractor you also have the paperwork risk: you have to do accounting, tax paying, and have to verify you are complying with laws – not an easy task in this country.
Some companies do a hybrid of this. They hire people on a W-2 employee basis, and then re-sell them to other companies collecting revenue on a 1099 basis for themselves. They resell the time of their employees. Essentially this Contractor company takes on the risk and pays employees in a low risk way. The margin they collect as a middleman reflects the risk. They still call the people they resell Contractors, ans they look like contractors for the company that hires the Contracting Company. But from the individual perspective, they are Employees.
I think it is important that we differentiate. I have many friends that think they have achieved independence when they get a W-2 Contractor positions (in reality they got something less convenient than full time W-2 employment). If they feel complacent on their achievement, they may be missing the joys of full independence and full Consultant/Contractor status.
For more differences between W-2 and 1099 you can check plenty of sites on Google.
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