Independent Contractor 101: The Benefits and Risks

As you finish with your schooling and move into the world of work, you may be offered the opportunity to work as an independent contractor. With the advent of Lyft, Uber, Doordash, and other on demand services, these freelance positions have been increasing rapidly.

From the smallest startups to the largest multinational corporations, more and more companies are turning to independent contractors to complete projects, lead new divisions and augment their normal staffing. This can be a good deal for the business involved, but is it also a good deal for you?

The answer to that question will depend on a number of factors, from your personality and confidence level to your experience and financial situation. For the right individual, life as an independent contractor is far better than life as an employee. For others, the security of a full-time job is a much better fit. Before you make such an important decision, it is important to weigh the pros and cons of working as an independent contractor.

What is an Independent Contractor?

Being an independent contractor is much different than being and employee, and the distinction is an important one to understand. Independent contractors do not work for the company – they work for themselves. For one thing, instead of a W2 form with withholding, independent contractors receive a 1099 form.

Independent contractors are essentially business owners, even if they are not incorporated as such. They may work in the same offices as traditional employees, and even perform the same tasks, but independent contractors are classified much differently, with all the benefits and drawbacks that entails.

The Advantages of Working as an Independent Contractor

Working as an independent contractor has a number of built-in advantages, and the lifestyle can be very attractive. Here are some of the biggest potential advantages of working as an independent contractor.

Independence – The independent part of independent contractor is a very big deal, and for those who like to work on their own, a very attractive one.
Learning New Skills – The typical independent contractor may work at many different companies, learning about new industries and picking up new skills as they go. This ability to updates skills and learn new things is more important than ever before, and one of the biggest benefits of life as an independent contractor.
Contract Protection – The word contract is part of the independent contractor designation, and the protection that contract provides can be very valuable. Knowing what you are responsible for, and detailing the responsibilities of the other party, is a valuable form of protection, and one that most employees do not have.
No Tax Withholding – This one can be both a benefit and a drawback depending on your perspective and level of financial savvy. As an independent contractor, you will not be subject to tax withholding, so you will get 100% of what you earn. Keep in mind, however, that you still have to pay taxes – that part is covered in the next section.
Ownership – The chance to run your own business
No Micromanaging – Anyone who has ever tried to work with the boss hovering nearby will appreciate this one. When you work as an independent contractor, you can work at your own pace, and generally work with minimal guidance. You will still need to get the work done, but the hovering boss should not be a problem.

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The Disadvantages of Working as an Independent Contractor

Working as an independent contractor can be an excellent fit for some, but it is not the solution for everyone. There are some significant drawbacks to life as an independent contractor, and those disadvantages are covered below.

Tax complications – Since withholding is not part of the picture for independent contractors, their tax situations can get pretty complex. As an independent contractor, you will be subject to the self-employment tax, and that could raise your overall tax bill. You will probably need to make estimated tax payments as well, so budgeting becomes even more important.
No built-in retirement savings – Many employees have access to company-sponsored retirement plans like 401(k) programs, but independent contractors need to make their own arrangements. There are retirement plans for independent contractors, but they can be complicated to set up.
No guaranteed income – When you work as an independent contractor, the amount you make is solely dependent on how much, and how smart, you work. If you are a hard worker and a shrewd negotiator, you can do very well indeed. If not, you may have trouble making ends meet. You will need to complete your current project, but you will also need to hustle for your next gig.
The cost of business supplies – Depending on when and where you work, you may have to pick up the cost of the supplies you use. When you work on-site, you will probably have access to basic office supplies, but when you work at home, you will need to provide those essentials for yourself. You can take a deduction for both your home office and your business supplies, but the up-front cost is entirely up to you.

Working as an independent contractor can be a great way to gain flexibility, update your skills and learn about different industries. At the same time, it can be a tax nightmare and a financial uncertainty. In the end, only you can decide if life as an independent contractor is the right choice for your future career.