Disclaimer: Alliance Virtual Offices does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.
- Each Employment Status and what you get
- The Pros and Cons of Each Employment Type
- Making The Self-Employed Lifestyle Easier
Q: What are the 3 types of employment status?
A: The 3 types of employment status are Employee, Self-employed, and Worker. A worker is comparable to an employee, but without the wide range of perks and benefits.
Do you set your own hours, or are you required to be at your desk from 9 to 5 Monday through Friday?
Are your friends surprised when they hear you make your own schedule? How about when you tell them that you simultaneously may not have certain work-related protections?
Whatever your answer to these questions are, differences in employment status have long been a center of discussion within the workforce.
This is mainly because each type of status is often misunderstood.
However, having an understanding of employment status is critical for businesses and individuals because it outlines what type of pay and protections you are entitled to.
But let’s start here: what is the definition of employment status?
Someone’s employment status is simply the role of a worker within a company based on their contract of work or the amount of work they’ve completed.
For instance, the person could be a temporary employee working only during the holidays or brought on for just one specific project, while someone else could be juggling multiple jobs at once.
The 3 types of employment status include:
While all of these terms are often used interchangeably, they each have their own unique meanings and characteristics that can impact taxes, accounting, earnings, protections, and really your overall business.
So what are the differences between employment status? And why does it matter?
An employee status is a role that often coincides with our traditional views of the workforce.
People who are considered employees are typically bound by a contract, which can sometimes be handwritten or even verbal, that solidifies employment as well as the benefits and protections they are eligible for.
Usually, employees enjoy the most company-provided benefits, such as health insurance, maternity and paternity leave, paid vacation, statutory sick pay, labor protections such as unlawful dismissal, access to flexible work arrangements, and more.
In fact, some countries allow employees to have the right to request flexible working arrangements depending on their situation.
For instance, the UK government introduced the “right to request flexible working” legislation in 2003, which was mostly geared towards working parents.
Any UK professional can request flexible working arrangements if they are legally considered an employee, have worked for their employer for at least 26 weeks, and have not made any other flexible working requests in the previous 12 months.
In March 2018, a taskforce comprised of various UK government entities, business groups, trade unions, and charities was created to improve this legislation and expand it to more employees. The goal of this taskforce aimed to:
- Make work more accessible to older people, while still keeping them healthy
- Improve job satisfaction, as well as employee wellbeing, engagement, and productivity
- Boost company retention rates
- Cutting down on sickness absences
- Create a more diverse workforce and address the gender pay gap
Aside from the guaranteed perks, employees also have an agreed upon set of expectations that they are obliged to fulfill due to their contract.
This means the employers have more of a say in where the employee operates, exactly how they work, and when they are expected to complete tasks. If they don’t perform these tasks as guaranteed, they could potentially face consequences.
Additionally, employees are typically required to fill out a W-4 tax form when they are first employed.
This form is used to provide your employer with all the basic information so they can withhold the accurate amount of federal income tax from your paychecks. This includes:
- Your name
- Your Address
- Social Security Number
- Marital status
Employees will then receive a W-2 form at the beginning of tax season that will feature all of your basic information, as well as a report of the total income you made, as well as how much income tax was withheld from you that fiscal year.
Having self-employed status means that you are your own boss. If you’re self-employed, you likely do not have an employer or even own your own business.
But what is your employment if you’re a contractor?
Again, while some of these terms are often used interchangeably, having a full understanding of your employment status is essential, especially in the eyes of the IRS, which identifies “contractors” as non-employees based on their own classification system.
Because you are self-employed, you file your tax returns differently from your employee counterparts.
Related: W9 vs 1099: What’s the Difference?
If you are self-employed, you will likely fill out a W-9 form prior to starting work for your client. The purpose of a W-9 is similar to that of a W-4 and simply provides your client with basic information they may need for tax season.
Once received, your client will need to fill out a 1099-NEC form if you receive $600 or more in payments over the year. This form provides similar information that a W-2 form does for an employee and will report how much you were paid that fiscal year.
Prior to 2020, non-employee compensation was to be reported on the 1099-MISC form, but recent changes have been made in order to avoid confusion about deadlines. Now, the 1099-NEC is used solely to report non-employee compensation.
Even more, you have the ability to write off any work-related expenses on your taxes. This can range anywhere from home office supplies, travel, client lunches, software purchases and more.
As a self-employed individual, you are also expected to send your own invoices to clients in order to receive pay. Because of this, it is your responsibility to handle your tax-related deductions, such as paying your federal and state income taxes.
Other than tax-related differences, there is a more profound reasoning that people want to be self-employed.
Think about this:
Have you ever been in a traditional employee role where you felt that no matter how much effort you put in, you never progressed or felt appreciated?
Companies who do not recognize an employee’s good work are at a huge disadvantage.
In fact, a survey from LinkedIn found that workers who were promoted had a 70% chance of staying with their company, compared to the 45% chance for those who remained in the same position for three years.
Self-employment allows you to develop and enhance your skills, while appropriately recognizing and rewarding your work-related accomplishments. Oftentimes, employee roles make it difficult for individuals to advance despite the amount of labor they are putting in.
Additionally, you’re guaranteed more flexibility than any other employment status since you are setting your own guidelines for how you accomplish work and creating a schedule that best suits your needs.
You also may enter into contracts with certain companies depending on the job. The goal of a contract between someone who is self-employed and a client is to agree upon specifications about:
Keep in mind, the compensation you set for yourself should include the needs your client doesn’t cover for you that they would cover for a full-time employee.
This means including the costs of healthcare insurance, paid sick time, life insurance benefits, commuting, and more.
However, one of the bigger downsides of the self-employee lifestyle is the lack of employment rights. Being legally protected from discrimination, reduced wages, or unjust dismissal may be harder to prove due to your status.
A worker status hangs somewhere in between being an employee and a self-employed individual.
Think of it like this:
A worker is comparable to an employee, but without the wide range of perks and benefits.
However, a worker is still entitled to certain rights and protections, such as:
- National minimum wage pay
- Paid vacation
- Protection from discrimination
- Unlawful reduction in wages
Workers are to abide by a specific set of hours and are more or less told what to do by their employer. That means that they are fully expected to show up on time every work day and complete the tasks they are handed.
Additionally, similarly to employees, they cannot subcontract or outsource their work.
The Importance Of Understanding Your Employment Status
Although some of the differences between each employment status may be nuanced, it is critical that you have an understanding of what your own status is for a myriad of reasons.
This goes beyond knowing what simple perks or benefits you could be eligible for — there can be large repercussions if you don’t have an understanding of your employment position.
Specifically, one of the biggest differentiators is how we file our taxes.
As mentioned above, self-employed people will typically be dealing with W-9 and 1099-NEC tax forms. Similar to a W-4, companies will require a contractor or freelancer to fill out a W-9 so their employer has all the necessary information they need for tax season.
Once you are paid $600 or more by your client, they are required to fill out a 1099-NEC tax form that will be sent to you at the beginning of tax season and features how much you made in the fiscal year.
Additionally, if you are a business and have misclassified your workers, employees, or contractors, you could face serious consequences from the IRS.
Because a business can save an estimated 30% of their labor costs using independent contractors rather than employees, they may look to miscategorize their actual employees.
Doing so not only has legal consequences for a business, but it can greatly damage the tax revenue that would otherwise be put towards Social Security, unemployment, and other public services.
For instance, a New York task force that investigated workplace fraud in 2008 revealed that misclassifications cost the state over $4.8 million in just unemployment taxes.
Even more, a company can face numerous penalties if found to have misclassified someone working for them. If an employer does misclassify, they are also likely to be responsible for paying off employment taxes.
If you’re still confused about how to identify a person you’ve employed, the IRS suggests looking into three specific categories to make a determination:
What kind of say do you have in how this person operates? Do you tell them where and when to work? Do you offer detailed instructions on how to complete projects and tasks? Were you required to train them when they started, or did you let them use their own methods?
Do you pay the individual hourly, weekly, etc.? Do you reimburse their work-related expenses? Are you withholding taxes from their paychecks? Is the person simultaneously offering their services to other companies?
Does your company offer this person benefits like health insurance or a pension plan? Has a timeline of employment been discussed? Was there a mutual agreement (or contract) signed at the beginning of the hiring process?
Once you’ve been able to answer these questions, it should become abundantly clear what status people who work for your company fall under.
Having a true understanding of employment status means more than ironing out specific logistics — it’s a legal necessity.
Employee Status Statistics
There are 123.72 million full-time employees in the United States as of January 2021. However, this number is significantly lower than the same time in 2020, likely due to the ongoing pandemic.
At the moment, the unemployment rate has fallen to 6.3% as of January of 2021 after reaching a historical 14.7% in April of 2020.
Now, projections from the Congressional Budget Office (CBO) believes that the unemployment rate will average 5.7% this year, then continue falling to an average of 5% in 2022, and 4.7% in 2023.
Still, it will be several years before the unemployment rate reaches its pre-pandemic levels.
By 2026, CBO predicts that unemployment will average 4.1%, which is still higher than the average of 3.7% in 2019.
The Pros And Cons of Each Employment Status
Now that the differences between each employment status option has been laid out, you might be wondering if one would be preferable to another.
The answer to this isn’t cut and dry.
While some may argue that being an employee or worker and having guaranteed benefits and perks is the ideal position, there is an absurd amount to gain from being self-employed.
Of course, there is a slight convenience to having your employer withhold your income tax each paycheck and provide you with guaranteed paid vacations.
However, think about a world where you are your own boss, with no one to answer to but yourself.
Not only that, but if you’re self-employed you can also enjoy:
- Setting your own schedule
- Rejecting work if you don’t have a desire to do it
- Creating your own work environment wherever you please (coworking space, home office, coffee shop, etc.)
- Outsourcing or subcontracting your work
- Writing off business-related expenses, like the costs of maintaining a home office, software purchases, traveling, virtual office plans, etc.
- Eliminating the risk of liability, which negates the need for insurance
Overall, although being self-employed means taking on more personal responsibility, the outcome is a lifestyle that can be rewarding, spontaneous, flexible, and fulfilling.
Making The Self-Employed Lifestyle Easier
Although life as a contractor can be freeing in many ways thanks to the ability to work on your own terms, the amount of work that can quickly pile up and be overwhelming for you. This unfortunately can reflect poorly on your brand.
If you’re not careful, clients can take advantage of your services in a way that can hinder your professional growth.
That’s why advocating for yourself, having additional support, tackling a healthy work load, and always having a W-9 on file is absolutely crucial for those who are self-employed.
So what can you do to make your life as a contractor easier and more efficient?
If you find that your biggest issue is replying to emails and missing important phone calls, you might need an extra helping hand that can help you balance all of these tasks.
That’s why some contractors and freelancers opt for a virtual receptionist or similar services to cut down on the strain these cumbersome tasks can bring.
If you’re looking for a way to offset some of the everyday work-related stresses that can be hard to manage on your own, an Alliance virtual office plan could be the ideal choice for you.
Our virtual office plans provide small businesses and contractors with a fully-equipped toolkit for everything they need to run successful operations.
For instance, if you are a writer who is constantly receiving pitches via email (ahem…), it can be hard to keep up and answer each one.
But with our virtual office services, a Live Receptionist can do the work for you such as:
- Answer emails
- Screen incoming phone calls
- Dodge spam risks
- Make and keep track of your appointments on your business calendar
Even more, having one of our Live Receptionists on board is only a portion of the cost of hiring a regular employee.
Our Live Receptionists work to have a deep understanding of your brand, and successfully represent your business in a way that keeps you ahead of the competition.
If you’re interested in improving your professional image, have more time to focus on growing your services, and eager to have some extra help, check out our virtual receptionist plans here.
It’s all about automation.
Another way to offload the burden of menial work tasks is to automate your operational system.
Technology is a saving grace for many businesses, and luckily new advancements and integrations make it accessible to pretty much anyone.
Although automation may seem like a far-fetched resource only reserved for large corporations with indispensable cash, anyone from a contractor to a small business can utilize this technology to improve the workflow and your reputation.
So how can you implement automation as part of your work day?
- Customer relationship management (CRM) systems
- Sales force automation
- Automated email
- Knowledge resources
Chatbot services that can help take care of a customer’s issue without you having to lift a finger.
For instance, Facebook’s Messenger for Business service provides companies with automated chatbot tools that make answering simple customer service inquiries easy and quick. Using these tools helps boost your customer service relations, which is essential for success.
CRM systems allow you to collect customer data, such as email and phone numbers, integrate the information in a way that makes it easy for you to keep track of customers, and customize the service you provide them based on their preferences.
Sales force automation can help you automate sales-related tasks, which allows you more time to focus on more complex projects.
Additionally, most emailing systems have the option for you to set up automated responses. Doing this makes it easier for you to handle emails without leaving someone hanging for weeks only to hastily reply with, “Sorry for the delayed response!”
A knowledge base is a library that features essentially all company-related information that is accessible to potential customers or clients. This means that clients may not even need to contact you for any potential questions they could have.
Mental And Physical Health
When you are self-employed, the responsibility of having access to insurance and other health-related resources is on you.
Many times, those who are self-employed experience high levels of burnout, which can be detrimental to your physical and mental health as well as your work performance.
Knowing this, it’s essential for you as a self-employed individual to make time for yourself.
Doing so means more than just taking a break every now and then — it means perfecting your craft, giving yourself the tools to be a competitive professional within your field, while also giving yourself the opportunity to enjoy having a personal life.
If you’re finding yourself exhausted, stressed, or depleted of energy, try to make the following changes in your personal and professional life:
Schedule breaks throughout the work day
Make time for exercise or even a walk around the block
Have a routine
Begin your day like any other employee by taking a shower, getting dressed, or any other routine you can create for yourself, even if you work from home
Make some boundaries
Set boundaries with those in your household and your clients
Find a work environment that inspires you, whether that’s a coworking space, a coffee shop, or your home office
While working on your own accord comes with the misconception of minimal hours and complete freedom to do whatever you want, you might find yourself stretched thin by taking on too much.
Giving yourself personal guidelines and being clear about your boundaries is important when establishing a relationship with a client.
Without a healthy foundation, juggling the responsibilities of being a self-employed person can be difficult. So make sure to take the time to understand what methods work best for you.
So What’s Your Status?
Overall, having an understanding of your employee classification means more than knowing how you should identify yourself on your resume.
Employment status impacts various ways in which we operate every day. Some of us may happily crawl out of bed at 10 a.m. and work until we’ve accomplished our tasks for the day, while others may be required to be at their desk at 9 a.m. sharp.
Even more, knowing what basic rights you are entitled to can help you protect yourself, as well as ensure that you have the necessary tools needed in your everyday life, such as healthcare and retirement insurance.
Each employment status carries their own pros and cons, so it depends on your own personal preferences which may be the best fit for you.
While some people enjoy the stability and consistency of the employee and worker lifestyle, others may want to challenge themselves and exercise their talents under their own terms.
Wherever you fall on the employment status scale, knowing when to advocate for yourself is the foundation of any satisfied professional.
- W9 vs 1099: What’s the Difference?
- Top 5 Answering Services for Small Businesses
- How to be a Digital Nomad and Work from Anywhere