Being your own boss might sound like a dream career path, but be careful what you wish for. Owning your own business, even a consulting company, brings with it all of the of the details and paperwork required to keep a small business afloat. Understanding the benefits and disadvantages of being a contractor will help you decide if flying solo is right for you.
Contractors have more freedom, but more responsibilities, as well.
What is a Contractor?
Contractors are workers who negotiate agreements that allow them to work for a business without the formal and legal agreements that govern an employer/employee relationship. Contractors often have work arrangements with limited timeframes, or open-ended contracts either party can cancel on short notice.
Government laws such as those governing breaks, social security contributions and minimum wage don’t apply to contractors. People who hire you are not your employers and cannot tell you exactly how to perform your work, set your hours, give you a dress code, require you to work in their office or mandate that you use their equipment or computers.
What about Taxes?
One of the disadvantages of being a contractor is that you must pay self-employment tax, with no employer contribution toward your social security and Medicare taxes. This doubles your tax burden from 7.65 as an employee to 15.3 percent of the first $142,800 of net income plus 2.9 percent on the net income in excess of $142,800, for 2021. On the upside, as a contractor, you can take tax deductions for expenses such as a home office, travel, lodging, meals and marketing.
If your employer offers you the opportunity to become a contractor – even if the offer comes with a raise — meet with a qualified tax planner before making the move to determine if increased taxes will put you in the hole.
Being Your Own Boss
Being a contractor gives you the freedom to set your own hours, take only the work you enjoy doing, complete projects without a supervisor micromanaging you, and otherwise running your own show. The downside to being your own boss is that you must also take on the burdens that go with this role, such as handling bookkeeping, marketing yourself to keep money coming in, performing detail work such as record-keeping, and chasing down clients who don’t pay on time.
Access to Benefits
Working on your own can prevent you from receiving the low-cost group benefits an employee receives, including health insurance and retirement contributions. On the other hand, one of pros of being a contractor is that you are not stuck with employer-provided benefits and can shop for the ones that best suit you. You can often get access to attractive group benefits by joining a trade association.