Confused about what it means to be an Independent Contractor?
Maybe you are working for a business but you want to start your own business.
Maybe your employer has suggested that you could work at home, and they will change your status to that of an Independent Contractor.
Before you make this change, you should know about some of the pros and cons of working independently.
- Independence. You may be able to work your own hours from whatever location you choose depending on the type of job. You should be able to negotiate pay rates and a payment schedule. You will have to keep records required by your host business such as timesheets etc.
- No Tax Withholding. Some people consider it a benefit that the payments you receive as an independent contractor don’t have income tax withheld. This can be a curse if you don’t put away funds to cover this debt. It will come home to roost every year.
- Deducting Business Expenses. Expenses you pay to run your independent contractor business are tax deductible. Check what is and is not an “approved expense”, never assume.
- An Increase in Earning Potential. Generally contractors are paid on an hourly or daily basis are paid every hour/day they work, unlike employees who are paid a salary. Contractors doing the same job of a full time employee, typically find themselves earning more money than their permanent counterparts.
- No Guarantee of Income. Being independent also means you don’t get a regular paycheck. If you are lucky enough to work for one or more clients who pay you regularly, that’s great. Manage your cash flow and have a slush fund to cover you through lean times.
- Missing Out on Basic Entitlements: Being an independent contractor, you have to surrender the right to entitlement such as sick leave and annual leave. This means it is up to you to make provisions for time of illness and holidays/down time in between contracts.
- You Still Pay Taxes. As an Independent Contractor, you still have to declare all the income from your work and you still must pay taxes and any other levies required on that income.
- More Administrative Work. As an Independent Contractor, managing paperwork, tax and administration (e.g. invoicing clients, chasing up account receivables etc.) can be a little time consuming.
TIP: An Independent Contractor can have a contract. Get a written contract from each person or business you work for. Having a contract spells out “what happens when.” Having a contract can settle many disputes before they start, and you can take a contract to court to get paid, if necessary.
If you need further guidance on the benefits and drawbacks of being an Independent Contractor, consider a consultation with one of us at Watson Corporate Services by give us a call on 02 6362 7581 or via our contact form here. This is a critical decision which can affect your future wealth creation and your current living standards.