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So you’ve been bitten by the side hustle bug and are considering contract or part-time work. You’re not alone.
Experts estimate nearly 44 million Americans have a side hustle and nearly half of all millennials side hustle.
But when it comes to secondary streams of income, not all jobs are the same.
Some people might work as part-time employees, while others will decide to be independent contractors. The type of job you have can impact your work situation, your income, and your taxes.
So which path do you choose?
Which One Is It?
Before you can decide which type of job is right for you, it is important to understand the difference between part-time employment and contract work.
Part-time workers fit the traditional work model.
You're likely a part-time worker if these criteria apply to your situation.
- You're assigned a supervisor.
- You have a single place of employment.
- You have a specific role and likely received at least some training for it.
- Your work is completed using workplace materials.
- You receive a W-2 at tax time.
Independent contractors resemble part-time employees at first glance. In fact, some independent contractor positions appear very similar to traditional part-time work.
It's not unheard of for some contractors to not realize the difference initially.
Independent contractors might also go by the titles of freelancers or consultants. If these criteria apply to your position, you're likely to be an independent contractor.
- You schedule and establish your role.
- You provide services for multiple companies or individuals.
- Your work is performed using your own materials (i.e. laptop, printer, etc.).
- You might perform different tasks
- You receive a 1099 at tax time.
Once you have a clearer understanding of the type of side hustle you're contemplating—either part-time work or independent contracting—you'll want to be sure you have an understanding of the differences come tax time.
You will also want to explore the various benefits of both types of work to determine the best fit.
Tax-Time Differences of Part-time Work and Contract Work
While you may not be particularly concerned about your title, someone is, and that someone is the IRS. The way in which tax collection occurs is dependent on the type of work you do.
As a part-time employee, you will have federal and state taxes taken out of your paycheck each pay period by your employer. Other withholdings like Social Security and Medicare will also be taken out.
Then, you will receive a W-2 form from your employer at tax time as verification of what you earned. And what you paid in taxes. ‘
An independent contractor, on the other hand, can face a more complicated tax situation.
Though you may pay processing fees from Paypal or similar payment systems, you are not paying taxes when you receive your income.
Instead, you'll receive a 1099 form from each individual or company you held a contract with throughout the year if you earned $600 or more. If you earned less, you still have to report the earnings but won't receive a 1099.
In addition to filing taxes at tax time, many independent contractors who start to earn a significant side income have to file self-employment taxes quarterly to avoid fines come tax time.
The general rule of thumb is if you expect to owe $1,000 or more in taxes, then file estimated payments quarterly.
In addition to navigating self-employment taxes, you will also want to explore the various deductions you may be eligible for as an independent contractor.
The Benefits of Part-Time Work
Part-time work can be an opportune way for you to explore your hobbies, talents, or passions. While working for an established company or organization and earning money.
The added stability can be a great benefit to someone who is looking to earn extra income without putting in additional time following leads, networking, and building a client base.
There's also very little required of part-time workers in terms of start-up costs since most companies will supply materials and perform their own training.
Another benefit of part-time work sometimes overlooked involves benefits.
It's true many part-time jobs do not come with benefits like 401k retirement packages or health insurance. But some offer more benefits than you may realize.
This is why it's so important to ask about everything from employee discounts and paid time off to health care and educational assistance.
More so, should your schedule permit and your workplace offer the opportunity, part-time jobs can be scaled into full-time positions providing complete benefits packages.
While this may not translate into a raise, benefits can be invaluable.
The Drawbacks of Part-Time Work
A supervisor predetermining your roles and responsibilities leaves little room for you to choose your focus or cultivate entrepreneurship. Depending on the work, the pay can also be low, at least initially.
Part-time work can also be unsteady in the sense that many part-time positions are seasonal or come with large swings in the hours that are available to each employee.
The Benefits of Contract Work
Side hustling as an independent contractor comes with many benefits as well. This type of side hustle is ideal for someone who craves flexibility and independence.
As an independent contractor, you are able to set your own hours, determine your tasks, and walk away from opportunities that don't suit you.
You may also have more room for income growth as an independent contractor, especially if you choose a more lucrative field like something related to technology. Or if you cultivate a niche where there isn't much competition.
It also comes with the added benefit of scalability.
While it may not be possible for everyone who side hustles, there are certainly individuals who've scaled their side gigs to the point of turning them into full-time businesses.
The Drawbacks of Contract Work
Additionally, there can be considerable expenses upfront, including purchasing materials and software as well as enrolling in a course to learn new skills.
Even though most part-time jobs don’t offer large employee compensation packages, contractors rarely get any benefits. Work can also be unstable and unreliable, at least initially.
While many independent contractors set out with determination to make headlines with their income, it isn't unusual for the first few months or even the first year to net a loss when initially establishing yourself.
Contractors can also face serious burnout even when they find success. You may take on too much work always trying to grow your business.
Without turning down some jobs, recognizing being over-committed, or hiring help when you need to, you may turn out poor quality work, or your full-time job, family life, and health may suffer.
You're ready to try your hand at a side gig. For some people that means securing part-time work, while others will set out to work as an independent contractor.
There's no one right way to build a second income stream.
Understanding the differences between part-time and contract work, as well as the tax implications and the benefits and drawbacks, can help you make the best decision for your particular situation and interests.
Article written by Penny