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I'm a software engineer doing some freelance work for a large organization. The process that they have in place, if I were to work for them as an individual, is that I'm expected to be put on their payroll.

However, I've also recently organized an LLC for software I plan to release in the near future. This work seems to fall under the umbrella of the kind of work I'd do in relation with my LLC, so it's at least plausible that I could instead act as a vendor and have the LLC "do the work", with myself on the payroll of the LLC. It's being taxed as a pass-through, so I won't get hit with any extra taxes.

Are there any non-obvious benefits or pitfalls to either option? It seems like getting on their payroll will be about as much of a pain as becoming a vendor for them, so I'm not factoring in that particular difference when deciding.

  • Feel free to suggest tags for me to add to or remove from this question; I wasn't entirely sure how to categorize it. – Ryan Kennedy Apr 1 '16 at 17:08
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Payroll plusses:

  • Benefits
  • Downtime is expected, whereas downtime means "go home" as a contractor sometimes.
  • Payment on time is required by law
  • Possibly, the company will invest money in training you
  • Workers comp in case you hurt yourself
  • When you leave for the day, no need to worry about business taxes, marketing, advertising, etc

Payroll minuses:

  • You're more deeply embroiled in the politics
  • If you're salaried, it's a real danger to work for a workaholic boss because overtime can become a burden
  • Less flexibility in where your earnings go
  • You won't get the full experience of doing your own thing.
  • You can't hire somebody to delegate work to
  • Far less flexibility to work remotely or on your own terms

This is a good start. Hope this helps

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I've been a freelancer since 1994 - We call it a contractor or consultant in Europe.

As an employee, you get health benefits, possibly a pension, car, cell phone etc as part of the job. A sick day and your holidays won't effect your pay check. After a couple of years or more, depending on laws where you live, you could get a redundancy check if they were ever to let you go without cause.

As a contractor/freelancer, you don't get any of the above. Paperwork is heavier - I answered a question on the startups exchange a while back which should give you more food for your thoughts:

https://startups.stackexchange.com/questions/8576/how-to-build-a-startup-freelance-software-qa-in-the-us/8585#8585

I fell into contracting - I was out of work, someone offered me a short contract which ended up lasting 9months - others followed, as well as homes in five EU countries, many new friends, but I also lost out on important family get togethers...

I have enjoyed it though I'm tired of it now. It depends on your personality - if you are happy with 9-5, if interviews once or twice a year bother you, if you are hopeless at paperwork... It can be very rich work (10-20k a month is regular for me and I take two to three months vacation a year too), but I do not recommend jumping into it for money alone. My brother tried and hated the irregularity of it all - you really need to be flexible.

I hope something above helps.

Best of luck!

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Like many of the other answers here there are pros and cons to weigh:

Payroll Pros:

  • Regular consistent predicable payment (i.e. no need to way out net
    payment terms)
  • Automatic tax withholding
  • Easy process as tax time (just get a W-2)
  • Sometimes access to benefits (thoughthey are likely mediocre on a temp- W2)
  • You are covered under the employer's professional liability policy (i.e. general liability, errors and omissions, worker's comp etc.)

Payroll Cons:

  • Unable reduce your taxable income through operating expense deductions and other tax deferral vehicles like a SEP/IRA.
  • You are unable to build business history to your LLC (something you will likely need if you want to become an approved vendor in the future).

To me, it comes down to cash flow. If you have the cash to wait out the payment terms and spring for the liability insurance, you are better off taking advantage of the tax perks of self-employment. If cash flow is an issue, payroll is always the way to go.

Full disclosure, I work for a company named "MBO Partners" who provides tools to self-employed individuals. You may find some of their tools useful or you may not, either way this answer should help you may you decision.

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