• Pros and Cons of Being an Independent Contractor

    January 30, 2012 by

    W2 vs 1099 check boxesA poor economy has pushed some unemployed or underemployed Americans towards self-employment. For some, the opportunity to be their own boss may prove serendipitous, while others may find that the costs of not being an employee are unexpectedly high.

    “The number of independent contractors has risen in sectors that people normally don’t associate that closely with the self-employed,” said Michelle Walker, the writer of the article, and an independent contractor herself. “Some of that increase is probably a natural result of the internet, and the growing convenience of doing business in other places besides an office. But some of it is also probably attributable to dynamics of the economy. People who are defined as ‘unemployable’ by the establishment may discover that finding their own work, through various projects, is a viable option.” But should this solution be a long-term one? CreditQ suggests that, while there are some financial advantages to being “a 1099” (particularly for those who can’t find work elsewhere), there are also drawbacks that not everyone is aware of.

    Some of the Advantages of Being an Independent Contractor:

    • Most independent contractors can set their own prices.
    • Companies tend to pay a higher rate to 1099 workers than they do for W2 employees because there are fewer costs associated with hiring 1099 workers.
    • Contractors sometimes have more flexible work schedules, and may even work off-site or at home, at least part-time.
    • The self-employed are able to put more money away in tax deferred accounts, like an SEP IRA.
    • It’s possible to deduct certain business-related expenses on taxes.

    Some of the Disadvantages of Being an Independent Contractor:

    • Some independent contractors are taken advantage of; they should be classified as employees, but their employers unlawfully classify them as independent contractors in order to bypass payroll taxes and benefits.
    • Some 1099 filers don’t understand the differences between being an employee versus a contractor, and are enticed to working as an independent contractor rather than a traditional employee.
    • Contractors are not eligible for paid vacation, sick days, health insurance, worker’s comp, or unemployment benefits.
    • They’re not covered by an employer’s liability insurance.
    • They’re also not eligible for overtime.
    • They’re expected to pay twice as much for Social Security and Medicare taxes (in the form of a self-employment tax).
    • Independent contractors pay estimated taxes to the IRS each quarter if their income is above a minimum amount.

    CreditQ.com notes that, while there are advantages to being self-employed, some people who come to it as a consequence of a poor economy may want to reevaluate their overall financial health, and reconsider their independent contractor status. As employment rates start to rebound across the country, and companies begin to reinvest in hiring, now might be the time to seek traditional employment, and relegate the self-employment work to a second job or weekend hobby.

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