TheStreet

Independent contractors, those mysterious workers who seem to have all the freedom in the world because they "work for themselves." Speaking from experience, it's not that glamorous. However, there are some advantages and disadvantages to contract work. You do have a lot of freedom in how you work. You also have a little more of a headache when it comes to paying your taxes, as well as ensuring consistency of income.

What Is an Independent Contractor?

According to Law.com, an independent contractor is "a person or business which performs services for another person or entity under a contract between them, with the terms spelled out such as duties, pay, the amount and type of work and other matters. An independent contractor is distinguished from an employee who works regularly for an employer." You are not an employee of the business or entity you are providing services for, but they are paying you for your service. In essence, you are your own business; a self employed individual that provides work for outside entities.

Many writers operate as independent contractors; writing articles and commentary for newspapers, websites, and other businesses. Companies can use independent contractors for services where they might not want to incur the full costs of keeping an employee on staff. They pay the contractor for the services provided at agreed-upon fees, and avoid the extra expenses of an employee such as benefits, office space, and Social Security/Medicare.

Pros and Cons of Being an Independent Contractor 

The primary advantage is freedom. An independent contractor has much more leeway in terms of choosing their workload, setting their own schedule, and choosing who they work for. In this day and age, a great deal of work can be done remotely. Independent contractors benefit greatly from that trend. Furthermore, an independent contractor can provide work for more than one entity; i.e. you can consult for multiple companies, or you can renovate houses for multiple individuals. The autonomy also means you can negotiate different deals and rates with the different clients.

The advantages that an employer gains from hiring an independent contractor go hand in hand with the disadvantages experienced by the independent contractor. You will not receive all of the benefits that you would as a traditional employee of a business. There is no 401(k). There is no health insurance. You lose a lot of security by taking the path of an independent contractor. As in life, that is usually the price paid for personal autonomy.

Example

According to the IRS, you are not an independent contractor if you perform services that can be controlled by the employer. Independent contractors are quite common in construction or the trades. If you have your kitchen renovated, you'll very likely be hiring an independent contractor. Workers with these types of craft skills are often self employed, seeking out jobs as opposed to having a job working for someone else. Many doctors, lawyers, dentists, and individuals who offer their services to the public are often independent contractors. 

As mentioned above, freelance writers work as independent contractors, writing articles and selling it to publications. Another example is real estate agents: many agents are independent contractors, working under the agency for commissions in exchange for facilitating the sale.

Independent Contractor vs. Employee

As a contractor, you are mostly your own boss. You make deals with other persons and entities in return for talents and services. You are not really an employee of anyone but yourself. You simply work together with others because you both have something of value to offer each other.

If you're an employer, your employees are under your supervision. You have much more control over their day-to-day work and schedule, and you pay them a salary or by the hour. A contractor is more of a business partner. They are independent from your business entity, but provide work to you for agreed-upon compensation. In a way, you're outsourcing work to an outside entity with whom you have a business relationship.

A contractor isn't technically an employee, so an employer saves themselves a lot of responsibility by paying an independent contractor to do some work, rather than increasing their staff on hand. You avoid the share of taxes, benefits, and office costs that you might assume were you to take on another employee as opposed to paying an independent contractor. That said, contractors do not come cheap, and many times they command pretty high fees for what they do.

How Do You Pay Taxes as an Independent Contractor?

Perhaps the biggest ire for independent contractors is paying self-employment taxes. The portion of your paycheck that would normally be withheld by an employer is instead paid to you. Then you must pay those taxes yourself. The self employment tax of 15.3% covers what you owe for Social Security and  Medicare. It is your responsibility to ensure you set aside money for these taxes because it is not taken out by your employer. This, along with the lack of benefits, really makes you your own manager. You have to run your income like a business, even if you aren't incorporated.

The Right Path?

In summation, taking the route of being an independent contractor can be very rewarding. You will most likely have much more personal freedom in your life, and have more control over the work you do. The flipside is you have a lot more responsibility on your shoulders. You will not receive the same kinds of benefits as if you worked for someone else. To that end, you have to weigh the costs of freedom and variability against the added cost of covering things like your own healthcare and retirement savings.

From an employer's point of view, it can be advantageous to pay independent contractors to perform services, as it negates the need to have a full time employee that you have to pay benefits for. The catch is that contractors are a bit more free to do as they please, and are not necessarily dependent on your business for their living; therefore making them more likely to put effort into ventures outside of your enterprise.