If you’ve been working for a while as an employee, you might be ready to start your own business as an independent contractor. It’s good to begin as an employee, so you can pick up skills and get more confidence in your abilities. As an employee, you have the security of a regular salary. You can concentrate on learning advanced techniques without having to negotiate with clients.
But now that you’re more experienced, you might be ready to take control of your own business. Perhaps it’s time to think about the differences between an employee v an independent contractor.
The Benefits of Being an Independent Contractor vs an Employee
Being an independent contractor vs employee can be very tempting. Here are some of the main benefits of being an independent contractor vs employee.
You get credit for your work
When you’re an employee and you do an awesome job, you get thanks from your boss. But if you’re an independent contractor who does awesome work, you’d earn more money. You’d get a reputation for excellent work, which would bring you more jobs. You’d be able to raise your prices too.
You’re in control
One of the biggest benefits to being an independent contractor vs employee is that you’re the one in charge. You can set your own hours. There’s no pressure to work overtime, and no boss telling you that you have to be at work by 9am every day.
You can earn more money
When you’re an employee, you can only earn your salary. You don’t really have the opportunity to raise your income beyond that. But as an independent contractor, there’s no limit to what you can earn. You can raise your prices and work more hours. If you hire your own employees, you can even work several projects at once.
You can pay less in taxes
Employees can’t claim business expenses as tax-deductible. But as an independent contractor, you’ll usually be able to claim all your business expenses and lower your final tax bill. That includes the cost of buying your tools, running a home office, marketing, and more. The tax benefits of independent contractor vs employee mean that you’ll usually pay less income tax.
What is the Difference Between Being an Employee and Being an Independent Contractor?
If you’re thinking of switching from employee to independent contractor, it’s important to understand the differences between them.
- Employee benefits
As an independent contractor, you don’t get any employee benefits. You have to pay your own health insurance, and you don’t get any paid sick days or vacation days. Of course, the plus side is that you can take a day off when you need it, without having to explain to anyone.
- Paying taxes
When you’re an employee, you only pay 7.65% in social security and Medicare tax. Your employer pays a matching amount. But as an independent contractor, you have to pay the full amount of 15.3%. You also have to pay your own unemployment tax.
- Financial paperwork
When you’re an independent contractor, you’ll usually have to make estimated tax payments every quarter. That means more paperwork. You’ll also have to fill out a Schedule C profit and loss form, to declare profit or loss from your business.
- Responsibility and liability
An independent contractor is responsible for the finished project. If the client isn’t happy, you’ll have to deal with it. You’re also liable for any business debt, mistakes, or accidents in your office or work site.
If you’re an independent contractor, you’ll bear liability if someone gets injured, you make a professional mistake, or you break copyright. That’s why you need your own insurance for independent contractors.
- Regular income
Your employee paycheck comes on the same date, every month, so you can build your budget around it. But independent contractors get paid when they finish the job, so your income could go up and down each month.
- Risk and stability
Even if business is going badly, employees still get paid. But independent contractors risk making a loss. If you don’t get enough work, you still have to pay your fixed costs. You also might not make enough money to cover your expenses.
Tips on Switching from an Employee to Independent Contractor
If you’ve thought about being an independent contractor vs. employee, and decided to make the change, congratulations! It’s a big step, so here are some tips to help you avoid some classic small business challenges.
- Secure your finances. You’ll need to pay the startup costs for your business. That’s everything from buying tools and equipment to paying for your business license and insurance premium. Make sure that you have enough saved up to cover these expenses, or that you can get a small business loan.
- Write a business plan. A business plan describes everything about your new business, like your expected expenses and income. You’ll need a business plan in order to get a business loan.
- Create a marketing strategy. Before anyone can hire your business, they need to know that it exists. Think about how you’ll spread the word about the services you offer. Will you need a business website? Do you want to pay for ads in local papers, or focus on word of mouth recommendations?
- Set up a time management system. When you’re an employee, you just have to focus on doing your job. But as an independent contractor, you’re in charge of the whole business. You have to write invoices, check your income and outgoings, and schedule projects, as well as doing the same work you did before. It can be hard to juggle all these different tasks, so create a time management system in advance to give yourself a head start.
Switching from employee to independent contractor brings new challenges and new opportunities. As long as you plan ahead carefully, you can succeed with your new small business.