Most people have considered striking out on their own at some point in their career. Here are the basic pros and cons of becoming an independent contractor.
- An independent contractor is a self-employed person who provides goods or services to others under terms spelled out in a contract. In simplest terms, they work for themselves. Here are some of its advantages.
Freedom to set your own hours, rules, pay, and place of work. Answer to no one but yourself. Greater earnings potential since you dictate your rates. And the ability to deduct work related expenses from your taxes. If you're an artist, author, or another creator of tangible work, you have copyright ownership over the work and any royalties that arise from it.
Here are some of the most commonly cited disadvantages. The dreaded unpredictability. If there's no demand for your services, you're not getting paid. You might find yourself putting in more hours than you did before and working nights and weekends.
Your taxes will be complicated. Independent contractors don't have taxes taken out of their earnings, and they must pay additional social security and Medicare tax, when combined, known as a self-employment tax. Your taxes are due to the IRS quarterly instead of annually, and are an estimation based on what you've earned for the quarter.
There are no regular paydays since you're at the whim of your clients. Some may pay you late, others may not pay you at all unless you drag them into court. There's more liability for debts, failures, and any other unfortunate occurrence. You're not entitled to workers' compensation or unemployment benefits. There are no employer benefits, like health insurance, sick leave, or other perks.
Every business needs at least one license to operate and some will need more. You must get an employer identification number if you have employees or if you are a corporation or partnership. If you're a sole proprietor, you can likely use your social security number for this purpose.
A variety of other permits may be needed or you're subject to hefty fines. Choose a name that you're comfortable with and make sure that it isn't already taken. Register your business name with your county clerk and start grinding. Stay financially fit, friends.