Have you ever thought of working as an independent contractor? If you’ve applied or considered applying for a job that indicates you’ll be working as an independent contractor, then there are a few minimum requirements and things you should know before signing any contracts.
Working as an Independent Contractor
Independent Contractors Defined
According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”
Untangling the Tax Situation
Independent contractors are responsible for both the employer and employee’s portions of the Social Security and Medicare taxes. This means you’d be giving up 12.4% of your pay for Social Security and 2.9% for Medicare, according to the most recent rates set forth by the IRS.
This is quite a bit of money you’ll have to set aside, in addition to the estimated quarterly income taxes owed to the IRS every 3 months. Luckily, you can write off all of your work-specific equipment – laptop, business phone, printer ink, etc. – to reduce your tax burden. Independent contractors usually fill out W-9 and/or 1099 forms when tax season comes around.
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Work Flexibility and Instability
In most cases, independent contractors can work wherever they’d like. An exception to this is contractors who work at events here and there, but generally speaking you won’t be required to come to an office everyday because that would cross the gray legal area between contractor and employees.
Independent contractors relish the flexibility of being able to work when and where they want, as well as the opportunity to work for multiple companies at once. However, with great freedom comes some downsides. Independent work can be sporadic at times, and without a guaranteed paycheck from an employer there may be times when you’re not making any money.
If you suddenly lose a job or project – companies don’t need to give two weeks’ notice to non-employees – then you also will be disqualified from unemployment benefits as an independent contractor. This leaves contractors in precarious situations with a level of anxiety over their job security that many people don’t want to deal with.
On the flip side, if you’re financially stable on your own and you don’t mind the potentially inconsistent workload, then the advantages of being an independent contractor might outweigh the disadvantages.
Intellectual Property Ownership
Another gray legal area where independent contractors are concerned is who owns the copyright to written material, designs, and other forms of intellectual property. Generally speaking, the independent contractor reserves the right to ownership over the materials, unless a contract was signed, designating ownership to someone else.
If you are not an employee then you get to choose whether to give up ownership of your intellectual property. If you decide to give someone else the copyright, you could also charge more money for a project than if you had retained ownership rights.
Excluded from Employee Benefits
Perhaps one of the biggest downsides to being an independent contractor instead of an employee is the lack of access to employer-provided benefits such as health insurance, 401(K) retirement funds, sick days, and vacation time.
For example, if you get sick and can’t work for a week, then you miss out on money-making opportunities that a regular employee wouldn’t consider because they could just dip into their sick pay to make up their losses.
Independent contractors are also exempt from the Fair Labor Standards Act. The Department of Labor explains that if you do not qualify as an employee under the FLSA provisions, then the person hiring you is not required to abide by federal minimum wage or overtime pay laws.
In some cases, an employer might mislabel an employee as an independent contractor to gain exemptions from pay laws and reduce their tax burden by making the contractor responsible for taxes. This isn’t a common practice, but it is still worth noting in case it happens to you.
Is Independent Contracting Right for You?
There are many instances where you might want to try independent contracting such as:
- Trying to get your foot in the door at a company
- Seeking temporary or sporadic assignments due to a life event (e.g., illness, pregnancy, moving soon, going back to school, etc.)
- Looking for more control over your work schedule and/or reducing your commute to a regular job
- Consulting for multiple companies
- Finding extra sources of income beyond your day job
After taking in the pros and cons of independent contracting, it’s ultimately up to you to decide if you’d prefer working as an employee or as a lone agent.
Have you ever thought about working as an independent contractor? If you have any experiences working as an independent contractor and loved/hated it, share your stories in the comments section!