Your Paycheck: Employee vs Independent Contractor

Understanding Your Paycheck

Before we can discuss paychecks, it is important to determine whether you were hired as an employee or independent contractor. This is a very important distinction. If you are an independent contractor, you maintain primary control of your time, where you work, and the number of people you work for. If you are an employee, your employer controls your time (when you are required to come to, and leave, work, how many breaks you may take, where you perform your work, and whether you are allowed to work for a competitor.

There are advantages and disadvantages to each classification.

Employees vs Independent Contractors

Employees are eligible for protection under employee labor laws – they are normally:

  • covered by workers’ compensation in case of injury
  • may receive unemployment benefits
  • are required to be paid at least minimum wage
  • are normally eligible for overtime pay when they work over 40 hours
  • often receive benefits such as vacation time, paid sick time, maternity leave, life and medical insurance coverage and some form of retirement benefit.

Independent contractors are self-employed and have much more freedom in terms of how and where they choose to work. However, they do not have the same employee protections regarding minimum wage, overtime pay, and do not receive benefits given to employees of the company.

Employers are required to deduct Income Taxes from Employee Wages. Independent contractors have to estimate how much money they will owe to the IRS and State and Local Tax Agencies, and save enough throughout the year to pay those taxes when due.

The type of work you choose is up to you. There is no “right” choice – it’s simply a matter of what fits your needs. Some people like the stability of a job with regular hours, interacting with the same people every day, and having benefits. Others enjoy working for various organizations, having different jobs, and being able to work whenever they want. However, everyone should know, before they accept a position, what their job “classification” is.

Employees vs. Contractors: What’s the Difference? Created by Gusto

Let’s talk paychecks

An independent contractor will receive a check for the price set for a project, or for the hours worked at a specified rate. There are no deductions for taxes or benefits.
An employee’s paycheck is much different. There’s a “gross” amount – the hours worked times the rate of pay, or in some cases, a specified salary. Then there’s a list of deductions taken out of the wages for taxes, and benefits, leaving a “net” amount which is the amount of money the employee takes home.

There are so many payment systems today, it’s difficult to talk about a standard. The three most popular ways are:

  • Paycheck – you still get a physical check you take to your financial institution and exchange it for cash
    • Advantages – complete control once you receive paycheck. Do not have to divulge any banking information.
    • Disadvantages – can be lost or stolen – need to contact your employer for a replacement. May not be able to cash on holidays and weekends when banks are closed.
  • Direct Deposit – your “net pay” is deposited directly to an account you choose
    • Advantages – can normally chose up to three accounts to which to deposit money (checking, savings, investment account)
      • No worries about lost or stolen checks
      • Timely payment, no worries about when money is deposited, even when employee is on vacation
    • Disadvantages – can’t think of any
  • Pay Card – your “net pay” is deposited directly to an employer issued debit card, which you can use as a debit card to withdraw cash from an ATM, grocery shop, or shop online.
    • The advantage of a Pay Card is that you do not have to have a bank account or banking relationship to pay bills or shop in person or online. You can pay directly with your Pay Card.
    • The disadvantages include the possibility of monthly maintenance fees, out of network ATM fees, balance inquiry fees. Pay Cards can also be stolen and used.

The most common length of a pay period is bi-weekly – every two weeks. Approximately 43% of employees are paid every two weeks or 26 times a year. Approximately 33% are paid weekly, leaving the rest paid monthly or bi-monthly (that’s twice a month or 24 times a year).

An old concept, especially popular for farm workers, is becoming popular again — daily pay. It is now used primarily for high-turn over jobs like being a restaurant server, driving for Uber, valets, delivery drivers, pet sitters, online tutors, lawn maintenance workers, daily laborers in construction, etc. It is also being used in the medical field, with nurses and other health care workers being paid after they finish their shift.

Regardless of how you’re paid, you should also receive a paystub or “pay advice” or “pay statement” which lists

  • An employee ID #. Most employers don’t use social security numbers, for security reasons
  • Pay period
  • Pay date
  • Total hours paid
  • Pay Rate
  • Gross Pay (hours paid x pay rate)
  • Deductions, including:
    • Tax withholdings – federal (income tax, Medicare and social security tax), state, city, and local taxes. There are nine states that do not have a state income tax – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming
    • Medical insurance deductions
    • Life insurance deductions
    • Disability insurance premiums
    • Dental insurance
    • Wage garnishments
    • 401K deductions
  • Net Pay (Gross Pay less the deductions) Otherwise known as your Take-Home Pay.
  • How many hours of vacation or “paid time off” are left in an employee’s bank.

As payroll become more automated, many employees don’t provide paychecks, paystubs, or pay advices. Instead they give employees 24/7 access to an online portal where employees can log in securely and view al their current and historical payroll information.

How to Read your Pay Stub

Important Thing to Remember

One of the most important things this video points out is “workers need to check their pay for accuracy.” Humans put the data into the system, and humans are not perfect. Anyone can make a mistake. So take the time to look at your pay statement to make certain:

  • The pay rate is right, the hours are right, and your deductions look right.

If you find an error, either mention it to your boss or call the Human Resources Department. Don’t be upset – remember everyone makes an occasional error. It’s your responsibility to make sure your pay is correct.