As the workforce continues to change, more and more people are looking for non-traditional ways to make a living. In fact, a study has shown that, in 2019, about 28% of people were self-employed at some point during the year.
So, if you’re thinking about becoming self-employed, you are not alone. The term independent contractor might be something you’ve heard many times before, particularly within the past few years. Let’s define what being an independent contractor means and then explore if it might be a career move worth making.
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What is an independent contractor?
The term independent contractor spans a number of industries. From a doctor to a musician and anything in between, many working individuals can be an independent contractor. According to the IRS, an individual is regarded as an independent contractor if the payer can only control or direct the result of the work, not how the work is done or what they will receive exactly.
Essentially, independent contractors are hired to complete a task without any strings attached. There will usually be either a written or verbal agreement between the independent contractor and the person requesting the services. Anything requested beyond the confines of the written agreement will be up to the discretion of the independent contractor.
Details like how the job is done or the hours that the contractor works per day are typically determined by the contractor. All that really matters is that the work is completed on time. Additionally, an independent contractor is not considered an employee of the business or the individual they are working with, but rather, the relationship is more of a partnership.
Independent contractor vs employee
As an independent contractor, you are not an employee of a business. There are a few key differences between an independent contractor and an employee.
As an independent contractor, you must consider employer laws, taxes and payment schedules. As an employee of a company, you are covered by both federal and state employment laws, as well as labor laws, which is not the case for independent contractors.
Labor laws are considered to be a form of protection against wrongful termination, in favor of being paid minimum wage and a way of keeping overtime rules in place. These do not apply to independent contractors.
Additionally, taxes work a little differently for independent contractors compared to taxes for an employee. For instance, for employees, companies will withhold taxes, including Social Security, income and Medicare.
On the other hand, taxes are not withheld from independent contractors. Instead, independent contractors are expected to pay their taxes on their own. Also, if you are a traditional employee, you are probably used to being paid in alignment with a constant, set payment schedule.
You are likely paid weekly, bi-weekly or monthly. Independent contractors are typically paid by way of invoices. The pay, as well as the timeline of the invoices, are usually determined prior to the contractor starting the job.
Independent contractor vs self-employed
Sometimes the terms independent contractor and self-employed are used interchangeably, but this is not the case. An independent contractor can be self-employed, but just because you are self-employed, it does not automatically mean you are an independent contractor.
A self-employed person can consistently provide a service to a business. They could even partner with the particular company to consistently provide products or services. An independent contractor typically has a time limit on a specific service arranged by a contract in advance.
Pros and cons of working as an independent contractor
Does it sound like working as an independent contractor is the right option for you? Being aware of both the pros and the cons of life as an independent contractor can help you make your final decision.
For starters, let’s take a close look at four of the advantages that you can enjoy as an independent contractor.
Working as an independent contractor comes with a lot of flexibility. You can set your own hours and decide if a job is not best for you, at which point you can turn it down. Additionally, as an independent contractor, you get to work out the terms of the job with your potential client.
Ability to control your own income
As an independent contractor, you know your worth which means you set your price. As a result, you can control your income based on your pricing and how many jobs you decide to pick up, giving you the freedom to control your income.
Potential for career growth
As you gain popularity as a contractor and improve your skill set, you might notice you have a lot of repeat customers and referrals depending on your line of work. The more well-known you are and the better your reputation, the greater your potential for career growth.
You have much more freedom in terms of what is considered a tax write-off when you are an independent contractor. Of course, you will want to be strategic and honest about your business-related purchases.
You will also want to keep track of all of your purchases. You might be surprised by what is and what is not considered a business expense, so make sure you look into the differences between the two.
Let’s take a look at some of the drawbacks associated with working as an independent contractor.
Taxes can be pretty confusing when you work a traditional job. As an independent contractor, there are some extra steps you must take because taxes are not taken out automatically each pay period.
Because of this, your responsibility as an independent contractor is to make sure you pay your own federal, state, and local taxes. Additionally, independent contractors must submit quarterly estimated taxes to the IRS.
So, when you receive your tax-free payments from your jobs, it is best to put money aside to account for the taxes you will owe. This can help you avoid the temptation of spending money that you will then have to pay back.
Lack of health insurance
Health insurance is essential. In fact, everyone is required for everyone to have health insurance or else they will risk having to pay a fee.
Unfortunately, as an independent contractor, you will not have an employer to provide you with health insurance. Instead, you must find your own form of healthcare, which could be significantly more expensive than what it would cost for an employer to cover it for you.
There can be many unknowns and serious instability when you work as an independent contractor. Depending on your area of expertise, your work options can sometimes be limited, especially if you have a seasonal skill. Furthermore, the instability associated with finding and maintaining a steady list of clientele can make it hard to manage your funds.
Providing your supplies
Typically, if you work in an office or for a large company, all of the tools and equipment necessary to do your job effectively will be provided to you. However, you usually have to provide your own supplies when you are an independent contractor.
This means you will need to know which tools are needed for you to complete your tasks and invest in your businesses consistently. Eventually, you will have all of the tools you need, meaning you will only need to be concerned about maintaining them. Still, depending on your services, this can initially be both overwhelming and expensive.
Working as a contractor and taxes
Taxes can be confusing for everyone, even if you don’t have to worry about taking out your own taxes and paying them yourself. When you work as an independent contractor, you need to consider a few extra steps when paying taxes.
There are two tax forms independent contractors need to complete, including a 1099 NEC, which stands for non-employee compensation, and a W-9 Form. You will also be expected to complete a 1040-ES form to estimate your quarterly taxes.
This can help to take the guess out of how much you might owe at the end of the year. Plus, paying your taxes quarterly makes it possible for you to avoid penalties for not paying your taxes on time.
Additionally, independent contractors are expected to pay the self-employment tax. The self-employment tax is a combination of Medicare and Social Security taxes. Unlike working a traditional job, these taxes are not automatically removed from your paycheck, so additional steps are needed to ensure that those taxes are covered.
The self-employment tax rate is 15.3%, and with this rate in mind, 12.4% goes to Social Security while 2.9% goes to Medicare. Your income tax rate is calculated in accordance to your adjusted gross income, taxable income, taxes, deductions and credits. Most of these taxes can be filed online, especially your quarterly tax payments.
Examples of independent contractors
Independent contractors are everywhere and exist in just about every profession. Here are some common examples of independent contractors:
- Hair Stylist
- Wedding Planner
How to become an independent contractor
Though tasks like taxes and finding health insurance sound challenging, it would seem to some that becoming an independent contractor is the hard part. Once you’ve decided that this line of work is best for you, you might be wondering what it takes to become an independent contractor.
Find your niche
Find out what area you want to specialize in and focus on perfecting the service you will provide. This could look like attending training, obtaining the proper education or even getting your current certifications.
Build your portfolio
A portfolio helps show potential clients what great work they can expect from you. Therefore, it is essential to have your portfolio in order and readily available to potential clients.
Advertise your services
Get your name out there to find your clients. Determine what method of advertising works best for your business financially and logistically.
In the digital age, this could look like creating a website or a social media page for your business. It could also just be the tried-and-true method of word-of-mouth referrals. Getting your information out there to build your clients is important.
Structure your business
Determine your business structure to help you ensure that you obtain the proper paperwork and licensing for your business. Will you be a sole proprietorship, an LLC or an S-Corp? Look into what makes the most sense for your business.
Is being an independent contractor for you?
Pursuing an untraditional path of employment can seem intimidating. However, it is worth considering now that you know a bit more about being an independent contractor.
You will need to stay on top of your taxes and maintain clients as well as the supplies you need to do your job properly. Also, keep in mind that there is a lot of freedom to be had as an independent contractor.
There are pros and cons to everything, but in this case, the pros might outweigh the cons for you when choosing to become an independent contractor. If this is the path for you, choose something you enjoy to live a life where what you do for a living does not feel like work.
How do I pay taxes as an independent contractor?
As an independent contractor, you will complete a 1040 ES form which estimates your quarterly taxes. You can make these payments online each quarter. Additionally, you will pay a self-employment tax.
How do I register as an independent contractor?
You can register your business with your state if you decide to make it an LLC, DBA or Corp.
What is an independent contractor?
An independent contractor is a self-employed person that provides services to their customer after negotiating the terms of a contract.