Becoming an entrepreneur, small business owner, and/or independent contractor is a great way to build something for yourself. While all of these ventures carry the potential for great rewards, they also come with some associated risks. Independent contractors come in many shapes and forms. Today, we will be discussing how the decision to work as an independent contractor can impact your life from a financial, personal, and business standpoint.
What Exactly is an Independent Contractor?
The distinction of an independent contractor is a legal term which determines how an individual is treated within the work force and as a taxpayer. The Internal Revenue Service (IRS) does not offer a concrete definition of who may be considered an independent contractor, but they sum it up nicely by stating: “If you are an independent contractor, you are self-employed.”
Common examples of independent contractors are lawyers, contractors, painters, writers, and so on. It is important to understand that it is not the nature of your job which makes you an independent contractor, but the relationship that you have with an employer (or lack thereof).
Independent contractors work and operate as individuals with no formal employer. This offers a great number of freedoms which we will get into below. It also means that independent contractors are not protected by certain labor laws which pertain to employee/employer relationships.
Paying Taxes as an Independent Contractor
Perhaps the biggest implication of working as an independent contractor is how individuals pay taxes. Everyone in the United States who earns an income is responsible for paying an income tax. Independent contractors are also responsible for paying a self-employment tax in most cases.
Additionally, most employees have federal, state, and local taxes withheld from their paychecks either in total or in part. This is not the case for independent contractors as there is no employer to withhold those funds. Instead, independent contractors must file quarterly returns and pay their estimated quarterly taxes.
At the end of the fiscal year, independent contractors must file their taxes and pay the amount in full. This is no different from any income-earning employee in theory, but the main difference is that independent contractors must account for their taxes due. The average American pays ~$10,000 in taxes annually. Independent contractors must make sure they are able to pay their taxes quarterly and annually.
Benefits of Working as an Independent Contractor
Of course, working without an employer comes with a number of benefits as well. Just a few of these benefits include:
Setting your own work schedule: there is nothing quite like the freedom to work when you want. Obviously, this takes a certain degree of discipline, but many independent contractors eschew traditional employment for this reason alone.
No reporting up the totem pole: another huge plus for many independent contractors is the absence of a boss. While many bosses and managers are great to work with, there is no denying that some can be a pain. Independent contractors enjoy the work reality of being their own boss!
Holidays, family time, vacations, and more: expanding on the work schedule advantages, independent contractors are also able to plan out longer vacations, pick up their kids from school more easily, and so much more.
Greater financial opportunities: traditional employment may be more steady, but it is also limiting. Independent contractors have the opportunity to make as much money as they deserve based on work performed.
Selecting your own benefits: this can also be a negative (more below), but the ability to shop for health insurance, life insurance, and other benefits can actually be both affordable and beneficial in the long run.
Risks of Working as an Independent Contractor
Not everything is sunshine and rainbows. Working as an independent contractor does entail some significant risks. Here are just a few to keep in mind before taking the plunge.
High volatility: when it comes to receiving contracts, getting work, or whatever the case may be for you as an independent contractor, there is always the risk of not getting the amount of work you need (or want).
Not all labor laws protect independent contractors: while many do, a large number of labor laws are specifically protective of employees.
Lack of benefits: many employees receive full or partial benefits. Independent contractors are responsible for purchasing their own benefits including health insurance.
All expenses are your responsibility: little things add up. Every expense for your business is now coming out of your paycheck and out of your wallet. Granted, business expenses should be tax deductible, but that is still a far cry from the company paying for that new laptop.
True Merchant Offers Payment Processing Solutions for Independent Contractors
The payment processing professionals of True Merchant understand the needs of independent contractors. Whether you are in need of mobile payment processing for your plumbing business or need to secure electronic transactions from around the globe, we have you covered! No business is too small and no problem is too big for True Merchant. We believe in offering fair and transparent pricing through a complimentary rate review before you make any decisions.
For more information on how True Merchant can help you as an independent contractor or business owner, please contact us today for a free consultation.