How to Become an Independent Contractor
If you are self-employed, you may have heard the term ‘independent contractor’.
It describes a person who works for themselves and runs their own business but contracts their services to other companies.
While all independent contractors are self-employed, not every self-employed person is considered an independent contractor.
This may sound complicated, but it's pretty simple when you break it down.
Let's pretend you are a graphic designer:
Scenario 1 – You have your own business working for yourself. You choose to create a wide range of downloadable printed items (such as labels, posters, stickers). You sell them to members of the public via sites such as Etsy or Redbubble. Anyone can purchase your products. You may take on bespoke commissions, but generally, your graphic design services are accessible to all.
Scenario 2 – You are hired by a local business to design a new logo or brand identity and design a range of marketing merchandise that reflects their brand. Although you set the fees yourself (and you may choose when and where you work), the client sets the deadlines for the specific project, and they have the final sign-off when they are happy with the end product.
In Scenario 1, the graphic designer is self-employed. They are designing products without any specific client in mind, and they have complete control over what they create and sell.
In Scenario 2, the graphic designer would be categorized as an independent contractor. This is because they are contracted to provide specific services (in this case, graphic design). Therefore, although they work for themselves, they must contractually adhere to the clients' requirements.
There are many reasons why a person may become an independent contractor. But before we delve into the pros and cons of working as one, let's examine what you need to do to start your own business.
First, it's essential to check out your local state regulations.
The rules may vary from state to state, so you must make sure that you adhere to the local legislation.
Second, you should consider your business structure.
Successful independent contractors will take the time to think about what they want to achieve. They may consider short-term and long-term planning, and as such, they will work out what business structure is best for them.
For example, some people may prefer to work as a sole proprietor. Others may choose to set up a Limited Liability Company (LLC). Finally, some people may decide to form a corporation.
When selecting your preferred business structure, you should take professional advice from a qualified accountant or similar expert who can explain the tax and legal implications.
When you are ready to start working, you will need to register for a federal tax ID number.
This is a mandated requirement that provides you with a unique number to identify your business.
You may also need to consider whether you should register with your local state for sales tax purposes (this is likely if you are selling a product).
Don't forget to register your business name. The last thing you want is to find that you are trading under the same name as another company.
Have you got the proper licenses or insurance in place? Many sectors require professional licenses that allow you to operate.
For example, if you work in food services, beauty services, construction, real estate or even broadcasting, you will likely require a professional license.
Your license must be valid – working without a valid permit could cause a wide range of easily avoidable problems.
You should also consider what insurances you may need. As standard, you will likely need some form of professional indemnity insurance or public liability insurance.
You may also want to consider a variety of health insurance or set up a self-employed pension.
Finally, when you are ready to begin, you should consider opening a dedicated business bank account to separate your business income and expenditure from your personal outgoings.
This will make it much easier to track your business finances and file an accurate tax return.
To make your life easier, you may also wish to consider investing in basic accounting software to help you track your earnings.
- You will be your own boss
- It can be highly lucrative
- You retain all of the profits
- You can choose your hours
- You can choose whom you work with
- You can choose how many clients to work with at once
- You can combine independent contractor work with employed work
- Some business expenses will be tax-deductible
- You are responsible for your own taxes
- If you are not working, you are not earning
- Your income could be precarious
- You will not be protected by employment legislation
- You will not have any employee benefits
- You have total responsibility for successes… and failures
Here are a few of the pros of becoming an independent contractor:
You will be your own boss – You can choose when and where you want to work. You can set your fee level (and control your income). You can take as much annual leave as you wish. By working as an independent contractor, you can completely control your career and maintain a positive work-life balance.
It can be highly lucrative – Because you will be setting your own fees, you can earn more money working as an independent contractor than an internal employee. If you are working as an independent contractor in a niche sector where demand is high, you could earn a higher salary even if you work fewer hours.
You retain all of the profits – Most independent contractors will pay themselves a set salary every month and put aside any remaining income for tax, maintenance, or even future-proofing. As the business owner, you are in control over what you do with the profits. You can choose to reinvest any leftover income into your business, or you could pay yourself a bonus or even give yourself a pay rise. The choice is entirely yours.
You can choose your hours – Many people are drawn to self-employment because they want to set their own working hours. You could start by working part-time and then increase your capacity as your lifestyle requirements change. This is perfect for those who may be balancing work with family life, those recently graduating from college, or even those considering a midlife career change.
You can choose whom you work with – We all want to work with people we get on with, and independent contractors have the ability to choose which company they work with. Perhaps there is a company with a few 'red flags' during the initial conversations – it's perfectly within your rights to refuse to work with a prospective client if they don’t seem a good fit for you.
You can choose how many clients to work with at once – Depending on your sector, you can choose whether you work with one client or on multiple contracts at the same time. It's all about your preferences and choices. You may find that working with various clients could give you a chance to pick up new skills and learn new attributes. You could also find that working on one project at a time allows you to specialize and prioritize.
You can combine independent contractor work with employed work – Many independent contractors start their businesses as a 'side hustle' away from their primary employment. They could work evenings or weekends to supplement their income or choose to reduce their employed hours to part-time (still retaining their employee benefits). This could give them the confidence that their business will be a success before taking that final plunge.
Some business expenses will be tax-deductible – Many of your business expenses will be tax-deductible, including business mileage, home business expenses and more. Make sure you research every expense that you can offset against your tax bill.
Of course, no working environment is ever perfect. Every decision you make will have negative aspects to it.
Here are some of the drawbacks of working as an independent contractor:
You are responsible for your own taxes – This is the most challenging aspect of working as an independent contractor because your tax return must be wholly accurate. To help you prepare, you need to be aware of what your state laws say (as well as federal law). In addition, you must set aside a proportion of your income each month to pay your tax bill. Failure to do so could lead to disastrous implications.
If you are not working, you are not earning – You are entirely responsible for your income, so you need to work a certain number of hours to achieve your dream salary. You need to be aware that you cannot bill your client for all of your work. Therefore, your hourly rate needs to subsidize the unbillable hours (such as working on admin tasks). You also need to be aware that you are not entitled to any paid-time-off policies, so any days off will be unpaid.
Your income could be precarious – Although working as an independent contractor can be more lucrative than regular freelance work, or digital nomad lifestyles, it can still be an unstable income. Contracts can finish at any time. If you have no work available, you will have no money coming in. This is partly why independent contractors charge such high rates – they use that additional income to cover them when work is scarce.
You will not be protected by employment legislation – This is an important consideration. Although independent contractors are working for businesses, they are not employed by them. As such, you will not be entitled to protection from employment legislation. For example, you will not be covered for overtime or minimum wage requirements. In addition, you may find that you are not protected under Equal Employment Opportunity laws.
You will not have any employee benefits – It also stands to reason that you are not eligible for any employee benefits as an independent contractor, even if you work many hours for a business. As a self-employed contractor, you will need to consider implementing your own benefits – one of the most pressing priorities should be to source your own health insurance plan.
You have total responsibility for successes... and failures – Working as an independent contractor can be brilliant during good times, but the reverse is also true. When things go wrong (even minor things), there is no one that you can blame. You need to be able to take the hard times with the good, and you'll quickly develop a thick skin.
The life of an independent contractor can be complex.
Whether contracting your services to a particular company or working with multiple companies simultaneously, you need to be efficient and highly organized.
It also helps to be financially savvy. You need to understand how to set the correct fee levels to provide you with a reasonable pay rate while still having enough money set aside to pay your taxes.
There are numerous benefits to working as an independent contractor. When working with multiple companies (either simultaneously or throughout a career), you will naturally pick up new skills and learn new ways of working. This enhanced knowledge will add to your reputation, giving you further chances to gain new work and charge higher fees.
Those who control their careers are more likely to feel professionally satisfied and benefit from a more positive work-life balance. This means you will feel more relaxed and have more confidence to have the lifestyle you dream of.
Independent contractors are often highly experienced and think they have gone as far as they can within the employed world. They want to take a risk and feel that they are challenging themselves while also benefiting from the financial rewards that independent contracting can bring.
It's important to note that working as an independent contractor can be risky. It's about understanding how to balance those risks. It's also about knowing how you can continually attract new work to ensure a stable income.
However, with enough planning and careful management, independent contractors can reap far higher salaries than those working in similar roles on an employed basis. And as such, if you do your thorough research and draft a well-written business plan, you should be able to reap the rewards of your knowledge and experience.