American professionals are no longer limited to nine-to-fives. In the last decade, the gig economy has grown by 15% as freelancing becomes more and more popular. Those working in the gig economy now account for over 16.4% of the American workforce.
With the gig economy on the rise, professionals and tradespeople are increasingly asking themselves whether becoming an independent contractor might be a better alternative than traditional employment. There isn’t a simple answer to this question; both types of work have their ups and downs. However, understanding the differences between these two categories — employee and independent contractor — can help you decide which is best for you based on your workstyle, earnings, and industry. Read on to find out what the benefits of being an independent contractor are.
Workers fall into two distinct categories: full-time or part-time employees and independent contractors. Independent contractors, or ICs, are designated as such more or less for tax purposes. Both freelancers and consultants fall into this category. That is because they contract work for themselves and are employed temporarily for various companies rather than employed exclusively to one company. ICs are entrepreneurs in business for themselves. As sole proprietors, they essentially market their skills, experience, and services as any small business does. This is the central part of the independent contractor definition.
Independent contracting isn’t limited to a particular kind of work; professionals and tradespeople across all industries can be ICs, from graphic designers to plumbers. Every industry relies on gig workers. However, recreation, construction, and business services are the top three industries employing ICs. States with the highest proportion of ICs are Florida, at 22%, California, at 20%, Illinois, at 18%, and Texas, at 18%.
It is essential to understand that workers cannot simply decide for themselves whether to be an employee or IC — both are strict legal categories for tax and other purposes. Certain requirements must be met and adhered to gain status as either.
There are pros and cons of being an independent contractor. With all of this in mind, you may be wondering how to become an independent contractor and whether you would do well to transition from employee to IC.
As tax season rolls around, being an IC starts looking more and more enticing. As an IC, you pay much less in income tax than traditional employees because no federal or state taxes are withheld, which means that you pay less income tax than employees earning the same amount. This is one of the greatest benefits of being a 1099 contractor.
Reporting income looks slightly different for ICs. Instead of paying state and federal income tax, ICs must pay estimated taxes to the IRS four times a year (once every quarter). ICs need to budget for this to avoid running into financial issues.
Not paying estimated taxes on time could result in huge penalties and a higher bill than you expected. Additionally, the IRS will impose a fine if you underpay your taxes as an IC. This comes in the form of a percentage rate for each day you are overdue on your taxes. Every year the percentage is different, but it usually ranges from 6% to 8% annually.
This is one of the biggest draws for those considering switching from traditional W-2 employment to 1099 independent contracting work. If you’re not someone who likes working on a team and would prefer to get the job done on their own, this may be one of the biggest benefits of being an independent contractor. Just as the term implies, you are independent and have the freedom to do things your way without supervision.
Another aspect of independent contracting many ICs enjoy is the freedom it allows them — not just in hours worked, but also in housing location, job location, and workstyle. You can choose the who, what, when, where, why, and how of your daily activities, making as much money as you want and taking on jobs as necessary. Because the jobs you work are for clients rather than supervisors, you determine your rates and hours.
Of course, the trade-off for flexibility is stability. However, some people don’t mind the slight risk of inconsistency in their work as an IC, which brings us to our next point.
As an IC, your work is more project-based than traditional employment in your field might be. Rather than working for one company, ICs work for many. Some ICs are “employed” by a hiring firm, which works as a middleman between ICs and their clients. Other ICs are strictly freelance and move from job to job independent of an agency. Some ICs enjoy this because they are not bound to a 9-to-5 work schedule and do not earn wages set by one particular company.
Of course, not working with a stable team of people may feel isolating. Some people place high importance on company culture. As an independent contractor, you may feel less attached to your projects and workplace because you are not in one environment for very long. Still, some people enjoy the opportunity to “test-drive” companies before committing to full-time employment with them. Some people choose to work as ICs temporarily before joining a company as a standard employee.
This is perhaps the most significant incentive for why many people choose to become ICs over standard W-2 employees. Simply put, ICs may end up earning more money than employees for doing the same work. It’s estimated that ICs earn 20-40% more per hour than employees. This is a double-edged sword.
The reason ICs are paid so much more for the same work is that employers do not have to cover things like employee benefits, health insurance and paid leave, and social security taxes. While the hourly wage is more, in the long run, employers save money. So while ICs are making more money per hour, they must also pay out of pocket for expenses that employers usually cover.
The companies ICs work for generally don’t reimburse for equipment, travel, meals, and other on-the-job expenses (however, you can write these expenses and more off your taxes).
On the other hand, this allows you to create a benefits package that is customized to your needs. Perhaps you don’t need every aspect of insurance coverage an employer provides and would rather receive the money going towards those expenses in your paycheck. In this scenario, you may prefer not to have money deducted from your paycheck automatically.
Because you are not an employee, companies do not have to pay you overtime. You may still be working more than eight hours a day, but you do not receive increased compensation.
This is a difficult question, one that only you (perhaps with the help of a financial advisor) can answer. But before quitting your 9-to-5 for the independent contractor life, you might want to consider the following:
There’s no doubt that choosing independent contracting over regular employment is a risky move. There are no doubts about the benefits of being a 1099 contractor as well. If done right, being an IC can be incredibly rewarding and offer benefits you wouldn’t otherwise enjoy as a W-2 employee. Deciding to be an IC is a balancing act of pros and cons. Making an informed decision requires a deep understanding of what you’re getting into and the challenges you might face in either employment style. It’s all circumstantial. Hopefully, this article has given you a clear idea of the advantages of being an independent contractor as well as somewhere to start when contemplating your next career move.