The freedom to choose jobs, a flexible work schedule and being your own boss are appealing aspects of contract work. But consider the disadvantages of not having an employer before choosing that route. With no one to handle – or remind you of – important financial details, you will have to carry the burdens an employer normally would.
You may find the freedom of contract work refreshing, but remember that there is no job security in being an independent contractor. Reviewing the pros and cons of contract jobs will help you decide if this path is a good choice for you.
Earnings for Contractors
Contract work is generally paid either at an hourly rate or a flat fee for a job. The disadvantage of an hourly rate is that there is no guarantee of steady, working hours and your income may fluctuate wildly. Working for a flat fee for a set time period or until a job is completed guarantees your income, but you must calculate your fee carefully to account for your desired hourly rate and the time needed to do the job.
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You may find yourself working many extra hours to complete a job on time, which will dramatically lower your hourly rate. If you bill more, your clients might decide this is one of the big disadvantages of hiring contract employees that requires a switch to bringing this type of work in-house. The uncertainty that comes with contract work is a big drawback for many, explains executive recruiting firm, J. Patrick + Associates.
You Pay for Your Own Benefits
Most employers offer a benefits package to employees that may include health insurance, disability insurance, paid time off and retirement plans. As an independent contractor, you won't be offered any of these benefits by companies that use your services and will have to purchase them on your own, which can be costly.
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If you're sick or want to take a vacation, no one will pay you for the time away from work. You also won't be able to draw on unemployment or worker's compensation benefits, if needed. If you want health insurance or other benefits, you'll have to pay for them yourself.
You Pay Higher Taxes
Paychecks from an employer come with taxes automatically deducted, but that's a duty you will have to take care of yourself as a contract worker. The company you're working for as a contractor will most likely pay you based on an invoice you submit.
You need to calculate the amount of income taxes to set aside and remember to cover not only your portion of Social Security and Medicare taxes, but that portion an employer normally pays, which generally doubles the amount withheld, explains legal website NOLO.com. You may also need to pay estimated taxes to the IRS on a quarterly basis. Set up a good bookkeeping system to keep track of tax issues.
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Your Liability Increases
Depending on the type of work you do, you may be held responsible for damages caused during work, and you should consider the possibility of being sued for anything from slander to copyright infringement.
Even if lawsuits are dismissed, they're expensive to fight, so you may want to purchase general liability or professional liability insurance. You will need to adhere carefully to the terms of your contract to avoid breaching the contract, which could result in non-payment or a lawsuit.
