Working as an independent contractor is quickly becoming a viable alternative to traditional full-time employment, but there are a few things you need to be aware of from the beginning. According to Forbes, freelancers and contractors make up nearly 15% of the workforce, with growth expected to be nearly 20% in 2020. A contractor operates as their own independent small business and offers their services to companies for short-term projects. When the project ends, they move onto the next assignment from another company. Of course, there are both advantages and disadvantages to independent contracting. Let’s take a look.
Contractors enjoy a great deal of freedom. They get to be their own boss and are able to work where they want, when they want. Imagine being unaffected by long commutes or office politics that make some work environments awful. In some cases, independent contractors even earn more money than they would in a full-time position, if they know their stuff and are in high demand.
Despite the freedom, contractors don’t get the security full-time employment provides. Benefits such as health insurance, paid time off and retirement are generally only offered to full-time employees. You also now have the administrative burden to make sure you are paying 15.3% to Uncle Sam for Medicare and Social Security taxes. As an employee you pay half of this, but when you are an independent contractor you are the business, so you must also pay the employer costs. Saving up for these expenses quarterly can be a tough transition for some. On top of that, contractors aren’t guaranteed a consistent flow of work. Once a project ends, it’s up to them to find another project to generate more income.
Make a Plan
If you are considering making the switch to independent contracting, start by planning what you are likely to earn and compare it against your expenses. You can get an idea of what your skills are worth and the volume of work available by exploring the many websites that advertise freelance jobs. Compare your expected income against your current expenses and keep in mind the new expenses such as health insurance, social security, medicare and paid time off.
Financial Advice for Contracting
Set up a Separate Bank Account:
Keeping segregation between your business and personal accounts is a must. When you use your personal bank account, it makes it harder to tell what your expenses and income are that you report on your taxes.
Open a New Credit Card:
Even if it’s under your name instead of a legal business name, you need a separate place to record the business’ expenses and income. The credit card paired with your new bank account, will give you a more realistic view of your financially stability.
Make it a Habit to File Taxes Quarterly:
Uncle Sam won’t bug you each quarter but he’ll penalize you for it at the end of the year if you don’t pay quarterly taxes. If monthly is more manageable, then submit your estimated taxes monthly instead of quarterly. Think about it this way — $1,000 a month is easier than a $3,000 bill. But Do Not Get Behind. Remember you have a friend in your corner too. Utilize your small business tax advisor to find the best tax credits for your industry and location. You can also ask the people in your industry what tax credits help them.
Tips to Remain a Contractor:
Do you have the ability to make or lose money? With DOL regulations, value-based billing will become more and more important. For example, you are buying technical support at $50 for each bug encountered, the independent contractor stands to make money if they work quickly or lose money if they are not productive and didn’t budget correctly. When you’re running a business you stand to make and lose money, new interpretations want to see this very easily with contracted work. Another helpful guide is the IRS’ 20 point checklist to ensure you’re working as an independent contractor.
If you’re in California, you also need to understand the new California rules. In September 2019, California legislature approved a new law that will offer thousands of workers access to increased pay, benefits, and employment law protections. In a nutshell, independent contractors will be treated as regular employees unless three conditions are met. To be an independent contractor, they must be:
- Free to perform their work as they wish
- Classified as a different line of work from the company contracting them
- Operating their own business
Establish the Business
Step one to establishing your business is opening a new banking account and credit card. Try out independent contracting and make sure it’s a fit for you. If you’re in it for the long-haul or have a lot of legal liability with your industry, you may want to consider setting up an LLC since it’s most flexible. It is costly to establish your business, so invest when you know it’s a business worth investing in. Once you hit a quarter million and are a big baller, you can consider different business legal structures, but from the beginning an LLC is best. Finally, get the necessary software and other tools you’ll need to effectively run your startup.
Get to Work
Once the small business is established you can start looking for work. Freelancing sites and social media are great online resources. Also, ask your network and form relationships with other contractors in different specialities. Referrals are an excellent way to get more work too.
But never, and we repeat never, stop finding work. Make the time to look for new streams of revenue and have a plan for how you will deliver on new work and which projects you will outsource.
And speaking of outsourcing, one of the most helpful things to have someone else manage as an independent contractor are your business taxes. Whether you’re filing quarterly, biannually, or annually, getting outside help from an expert who understands the differences between the Federal, State, S-Corp, C-Corps, Partnership, and Individual distinctions can be just what you need. So if you’re wondering where to start or just want to hand-off the task to an expert, Acuity can help you file with confidence. Explore our tax service offerings here, or email us at [email protected] to get the conversation started.