I have been an independent contractor and now, in my capacity as a small business owner, I hire independent contractors on a project by project basis. Having sat on both sides of the table, I understand how being an independent contractor can be confusing, so before you sign on the dotted line, here are a few questions to ponder:
What is an independent contractor?
As independent contracting is becoming a more popular means of employment, it is important to have a clear understanding of how it is defined. According to the IRS:
“People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”
I strongly recommend that you review the IRS’ website on the difference between being an employee and an independent contractor. Recent cases against Uber and Lyft in the state of California, in particular, have led to challenges over employment status misclassification. As such, California and other states have implemented an “ABC” test.
In California, workers are considered employees unless:
- The worker is free from the control and direction of the hirer in connection with performing the work
- The worker performs work outside of the usual course of the hiring entity’s business
- The worker is usually engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity
If you are unsure as to whether the position that you have been offered is really that of an independent contractor or an employee, check your state’s labor laws and if possible, consult with legal representation. Your employment status is important for several reasons, mainly because it can have long-term implications, especially as it relates to paying taxes.
Are you prepared to pay taxes?
As the aforementioned description explains, independent contractors have quite a bit of autonomy. The thought of working on a project for weeks or months at a time as a project status worker may sound ideal, especially if you dislike the idea of working for the same company over an extended period of time.
However, if you have never been an independent contractor, it is important to understand that your compensation does not factor in Social Security, Medicare tax, unemployment insurance, local, state or federal taxes. So, if you are accustomed to having everything taken out of your check for you by a conventional employer, you may want to think about how you plan to save for taxes.
Let’s admit, the idea of earning an exact amount is appealing, but remember this is your gross pay. In other words, it is taxable. So, if your compensation is $10,000.00 for a contract, remember, it is subject to taxation.
The easiest way to adjust to independent contractor status is to put away the money that is taxable. You may even want to open an account that you use just for the purposes of paying taxes. This will save you the heartache of not being prepared when it is time to pay the IRS.
Are you prepared for the end of the contract?
The duration of an independent contracting project is usually pre-determined. Many businesses rely upon project managers to help them determine throughput rates and reasonable deadlines. Because of this, many contracts will have approximate start and stop dates. These are often determined by volume and budgetary allocations.
If you are relying upon such contracts as the primary means for your income, then you don’t want to get too comfortable. You also don’t want to assume that you will have multiple opportunities to work on projects for the same company.
I highly recommend that you stay abreast of other opportunities and that you are preparing yourself for the next contract. Because you are not an employee, you also have the right to work on several other projects.
Being an independent contractor is a great way to experience job stability without feeling restricted by working for a singular entity. However, it is not for everyone. There is an element of unpredictability, and it is probably too stressful for those who are risk-averse.
My advice: Before you venture into the realm of independent contracting, make sure that you learn as much as you can about the position and whether or not it is a good fit for you.