Contract vs full time: 4 main differences to consider

There is a lot of perceived safety in being a full-time employee and to be quite honest, yes, there are some perks that come along with being part of a company’s internal team. Some of these can even increment over the long term as you spend more and more time working for that company.

If you work for some of the big companies these perks can be huge.

I was a teacher for most of my career before freelancing so the “perks” were more in the style of, “It’s teacher appreciation week, here’s a mug.”

(With the school logo on it, of course, so even on weekends while drinking your morning coffee you can be reminded of the questionable life decisions you’ve made…)

There are a number of differences involved in going contract vs. full-time.

For example, when you’re a contract worker you’re more likely to set your own hours, be brought on to work on specific projects for specific lengths of time, and you may not have access to the same tools/teams/information as full-time employees but these will vary depending on what company your contract is with. Typically you’ll run into not having the same access at a larger company rather than a smaller one.

There are 4 main questions I often get asked about the difference in contract vs. full-time so we’ll go over those next!

What about health insurance for freelancers?

This is a very important consideration when thinking about contract vs. full-time employment because it’s so expensive! If you’re living in the USA, health insurance is non-negotiable. While it can be tempting to go without, especially if you’ve been mostly healthy, just one serious incident without insurance can bankrupt you.

So as much as it sucks, you’ll need to grab some. While this is handled by the employer if you’re in a traditional 9-5, health insurance for freelancers can be purchased independently. It can be quite expensive so you’ll have to make the decision on which plan to go with based on your age, life circumstances, medical history, etc. It’s also quite different if you’re just paying for one person (yourself) or looking at covering a family.

While I was living in the US I paid for a cheap plan that I joked was an, “Only use this if genuinely dying plan,” because while the monthly charge was cheap, if I’d actually had a medical problem, it would have been expensive as hell.

I made this decision based on my personal medical history, age, and the hope and faith that I would continue to stay in good health. If you have pre-existing conditions, medical concerns, or dependents, healthcare will be a huge part of your decision to get into freelancing and you’ll need to be sure you can take on projects and set rates that will allow you to factor in this expense.

Although it’s possible to get a cheap plan for $1-200/month I encourage most of my students to set aside around $500/month for health insurance in order to be on the safe side.

Finally, if you can, one option is to get on a plane and get out of the US. This is a huge benefit in choosing contract vs. full-time work. The world is your oyster and you can get out there and explore it.

There are numerous digital nomad insurance plans that cover you at very affordable prices. Don’t let the name digital nomad insurance fool you. You don’t have to be constantly on the go. Most plans let you set your “area” so you can specify South America, versus a specific country and you’re covered if you’re based in one place and then traveling around the specified zone.

You can also look at picking up local health insurance if you’re staying for a while.

Or you can pay out of pocket depending on the country.

Any of these options let you skip the big hurdle of picking up super expensive health insurance for freelancers in the US.

And it doesn’t have to be something you consider right away, but if you like to travel, it could be a long term consideration in the direction you take your life and career.

Do contractors get holiday pay?

As a standard, no, they don’t. Contractors are only paid when working due to the hourly/independent nature of the job. Again, this is something that must be considered in a contract vs. full-time opportunity.

That being said, you may find an employer who — especially if you’ve worked with them on a long-term basis — offers some paid days or bonuses here and there. Just remember, these are perks and not to be expected.

These are more often offered in a type of contract employee role where you’re expected to show up at set hours and do virtually the same type of thing as regular employees. A contract employee role like this is very different from the freedom that comes with freelancing.

Instead of worrying about holiday pay, you should be smart and factor it into your rate. Figure out how much you’d like to earn, and how much time you’d like off each year, say 4 weeks. Then figure out how many clients/projects/hours you’ll need and at what rate in order to make what you want, and still have plenty of vacation time.

Just because contractors don’t get holiday pay you shouldn’t feel like you’ll be working all the time without a break. As a contractor, you’re a business and you get the freedom to set up your business in the way that works for you.

In my opinion, having weighed the difference in contract vs full-time employee, I’d choose contract every time.

I’m able to make far more as I directly impact my income — so even with the unpaid time that I take each year for vacations, I’m still far more profitable than when I was a full-time employee.

How will I know how to do taxes as a freelancer?

This is honestly waaaaaaay scarier up front, I’ll admit it. I never felt like I understood taxes as a full-time W2 employee and thought that as a freelancer I’d screw it up big-time.

But, I was pushed into freelancing so didn’t have the time to be scared. In my first year, I didn’t really know how to do taxes as a freelancer, not even what to record, so I simply dumped everything into a spreadsheet.

At the end of the year, I got an accountant from H&R Block. This seems like a big expense but it’s really not for the time/headache it saves. It’s important to let the professionals do their thing.

In my first year, without even knowing what I was doing my accountant complimented me on tracking everything. “Wow, most people aren’t this organized and it’s impressive considering you were laid off and then started this up without really knowing what you were doing.”

He was also able to look at my spreadsheets and figure out where I could write stuff off. I had no idea! Plus he knew all the various rules and was able to explain them to me.

For example, I had no idea at the beginning that I was supposed to be paying freelance taxes quarterly. (Yes, that’s why you should get a professional. Freelancers are supposed to pay taxes quarterly not all at the end of the year. You can be subject to a penalty if you wait ’til the end of the year so a professional helps you know things like that.)

Later, I got better organized and got a different accountant who understood my digital nomad lifestyle and how to do taxes as a freelancer. All I really have to do is keep track of what’s coming in and what’s going out, and check-in with him each quarter to pay taxes.

This might seem expensive but my first year with H&R Block was only around $460. When you’re freelancing, there are additional costs to running your business, but to me, the earning potential far outweighs them.

Working with a person skilled in tax laws saved me a boatload in knowing all the things I was allowed to deduct. Even though I pay a lot more now, I’m also making a lot more and saving myself a ton of headaches. Let the tax person do their thing while you focus on doing your business thing!

I would say there are two big differences you should be aware of when doing your taxes for a contract vs. full-time employee position. First, you’re expected to pay taxes quarterly as mentioned above.

And second, nothing is taken out for you. So all those line items that disappear from your paycheck in a full-time position aren’t being taken out here. It may seem like you’re raking in tons of money, but you will have to pay on that at some point. I typically recommend my students set aside 25% of their income in the first year until they know what tax bracket they fall into. For a full-length guide on how to handle taxes as an independent contractor check out this post.

What about retirement when you’re contract vs full-time? Is there a 401K for freelancers?

Actually, yes there is! While you may be missing out on the employer match up to a certain percentage that some companies do, you can still save for retirement on your own.

The solo 401K and the SEP IRA are both popular plans among freelancers. A benefit to investing money in a contract vs. full-time employee role is that you can put a lot more in these when you’re solo versus the cap set by your business. As of 2021, the SEP-IRA contributions max out at $58,000 as does the solo 401K.

Don’t let the lack of employer match/or perceived stability scare you. For me personally, when I was teaching, I was barely contributing $200 a month to my retirement. Sometimes during freelancing, I’ll sock away thousands a month. I’m making more, so I’m saving more.

I am a big fan of understanding what’s going on with your money and taxes but it can get very complicated. For help around how to pay taxes as an independent contractor and saving for retirement, I do recommend speaking with an accountant/financial advisor. It may cost you a little extra, but it well worth handing the headache off to a person who specifically focuses on that skill.

If you’re looking for an easy way to set up your 401K for freelancers check out Wealthfront.com. I am a huge fan of their service, having used them for the past several years. They are super user-friendly and help you determine the right type of account for your needs. Use my link to sign up and get your first $5K managed for free.

(Disclosure, I’ll also get $5K managed for free when you use my link so it’s a win-win. Plus I LOVE them and recommend them to everyone I chat about finances with! But definitely check them out and make sure they’re right for you.)

Now that you better understand the difference between contract vs full-time employment, which one is right for you? Still have questions? Be sure to reach out to me on Instagram! I love chatting with readers and answering questions.

If you’re considering diving into contract work, get my 22-page free guide. It’s called Your Freelancing Roadmap: Discover the 9 simple steps that lead to a six-figure income.