So you're considering taking the plunge into the world of independent contracting, also known as being a 1099 employee. Maybe you've heard whispers of the freedom and flexibility—two popular advantages of being an independent contractor; or maybe you're enticed by the idea of being your own boss.
Before you make this career decision, let's dive deep into what it really means to be an independent contractor, exploring both the 1099 pros and cons. Balancing out the alluring advantages and the potential drawbacks will help you determine if this career path aligns with your goals and lifestyle.
What is an independent contractor?
An independent contractor is a self-employed individual who offers services to businesses or clients under a contractual agreement. Unlike traditional employees, independent contractors are not on the company’s payroll. Instead, they receive payments for their services, often documented on a 1099 tax form, hence the term 1099 employee.
Being a full-time employee also has its perks—check out our open jobs on The Muse to find your perfect fit »
Independent contractor vs employee
Employees work for a company and receive a W-2 form for tax purposes. They have a steady paycheck as well as benefits like health insurance and paid time off, and are protected by labor laws. On the other hand, independent contractors operate their own businesses, manage their own taxes, and do not receive employee benefits or legal labor protections.
Tax form for independent contractor
This distinction between independent contractor vs employee is crucial, as it affects how you file taxes as well as your eligibility for benefits such as healthcare, retirement plans, and paid time off. As an independent contractor, instead of receiving a W-2 form for tax purposes as an employee would, you'd receive a 1099 form.
Pros and cons of being a 1099 employee
Deciding to become a 1099 employee is deeply personal, so it's important to understand the main pros and cons of being an independent contractor. While the freedom and financial potential can be very appealing, this career path also has its own share of challenges.
Advantages of being an independent contractor
Here are four advantages of being a 1099 employee:
1. Flexibility and autonomy
A big pro is the unparalleled freedom and flexibility that comes with setting your own schedule and choosing the projects you get to collaborate on. As an independent contractor, you have the option to select clients that align with your passions and values, paving the way for a more fulfilling work experience.
2. Potential for higher earnings
The potential for higher earnings is a compelling factor, as independent contractors often have the opportunity to negotiate their rates and take on multiple clients simultaneously, increasing their income potential.
3. Diverse experience
Working as a 1099 employee exposes you to various industries, projects, and clients. This diversity can enhance your skills, expand your professional network, and make you more marketable in the long run.
4. Tax deductions
Independent contractors can take advantage of various tax deductions not available to employees. Expenses like home office costs, travel, and supplies can be deducted, potentially lowering your overall tax liability.
Disadvantages of being an independent contractor
Let’s dive into 4 disadvantages of being an independent contractor:
1. Lack of benefits
Unlike traditional employees, independent contractors do not receive health insurance, retirement plans, paid time off, or other benefits. You’ll need to arrange and finance these aspects of your life independently, which can be a significant drawback.
2. Income uncertainty
While there is potential for higher earnings, there’s also the risk of inconsistent income. Projects may not always be steady, and you’ll need to manage periods of downtime or client loss without the safety net of a regular paycheck.
3. Self-employment taxes
As a 1099 employee, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, which can be a financial burden. It’s essential to consider these costs when determining your service rates and to budget for these expenses to avoid unexpected tax liabilities.
“You should first calculate your total tax liability by combining both the employer and employee portions of Social Security and Medicare taxes. This can be done using the IRS Schedule SE form,” says Dana Ronald, tax specialist and CEO of Tax Crisis Institute. “Once you clearly understand your tax responsibility, you can set your service rates accordingly to cover these expenses and avoid any unexpected liabilities in the future.”
4. Administrative responsibilities
Running your own business means handling all administrative tasks, like invoicing, bookkeeping, and marketing. These responsibilities can be time-consuming and may require skills that you’ll need to develop or outsource.
Once you get to a successful place in your journey as an independent contractor, you may choose to hire other professionals to help you with those administrative tasks—considering the cost that comes with building a team.
How to thrive working as an independent contractor
Despite these challenges, thriving as an independent contractor is indeed possible. With a growth mindset and strategic planning, you can set yourself up for success in this dynamic career path.
To truly thrive, consider the following strategies:
1. Skill development
Invest in your professional development by taking courses, attending workshops, and staying updated with industry trends. This not only enhances your skill set but also makes you more attractive to potential clients.
2. Financial management
Being an independent contractor requires sharp financial management skills. Set aside a portion of your income for taxes, create a budget, and build an emergency fund to navigate periods of inconsistent income. Using financial software can also help manage your finances effectively.
“I advise setting up a separate bank account for all business-related income and expenses, keeping detailed records of all transactions, and tracking your cash flow regularly,” Ronald says. “Working with a financial advisor who understands the unique challenges of being an independent contractor and can provide personalized guidance is also beneficial.”
3. Efficient time management
With the freedom to set your own schedule comes the responsibility to manage your time efficiently. Use productivity tools and techniques to stay organized, meet deadlines, and have a healthy work-life balance.
4. Personal branding
Establishing a strong personal brand can differentiate you from competitors. Develop a professional website, maintain an active presence on social media, and create a strong portfolio showcasing your work. Your brand should reflect your unique skills, values, and the quality of services you offer.
5. Seeking support
Surrounding yourself with a community of like-minded professionals can offer motivation and guidance. Joining professional associations, networking groups, or online communities can provide support, resources, and opportunities for collaboration.
As you contemplate this pivotal career decision, keep in mind that every success story has its setbacks, and each setback teaches us something valuable. With determination, strategic thinking, and a dash of boldness, you can chart a course for a fulfilling and prosperous career as a 1099 employee.
For more tips on navigating your career journey, stay tuned to The Muse. We’re here to support you every step of the way with practical advice and expert insights, understanding the challenges and triumphs of today's job market.