There are several indicators that point out that one is an independent contractor rather than an employee. Although these are negotiable, they determine the rates on their own and decide when and where to invest their time and effort. They dictate the number of clients and how many projects they undertake.
Contractors also have all the skills and equipment necessary to complete their job. You acquire true independence, and it is really your own business. With all the flexibility and independence comes more responsibility.
At the same time, you also should list all the specific details of the services that you are going to perform. Otherwise, you risk the client starting to ask you to perform tasks you did not initially agree on or not being willing to pay you the money well deserved.
What do they do?
Becoming a contractor might sound a little intimidating, but it really is not. Contractors work on a project-by-project basis and can take on as much work as they can handle from the same or different clients. When they start on a project, both sides agree on the deliverables and due dates, which are included in the contract.
When it comes to the type of services offered or products they sell, there is truly no limit. One can branch out into any industry, for any type of company, and take on as big or as small of a project you want. As long as you possess the skills and experience necessary to perform the work and there is someone ready to pay you to do that work, you are good to go.
Comparison of independent contractor with employee
Contractors are more like business owners rather than employees. They present their own rates and decide the time and place of their work. At the same time, they love to partner with the same entities. They have all the tools and training to get their job done. Moreover, just like business owners, they can delegate work to other professionals. Actually, you can say they are more on the same level as employers than they would have been in a typical employee-employer relationship.
Employees, on the other hand, typically have a specific schedule that they should comply with and the tasks they have to do. The worker is fully controlled by the entity they work for. Another difference is that they come to the workplace and expect the business owner to purchase all the equipment and tools necessary to fulfill the tasks set before them.
Problem of misclassification
Employers often misclassify individuals who work for their companies. An employer cannot tell a contractor when they should work unless they want to give them all the benefits that their employee would have. If your employer controls your working schedule and provides all the equipment, if you are clearly part of the company’s hierarchy, no matter what the business you work for calls you, you are clearly not an independent contractor. Thus, it would be against the law to treat you like one.
Whether your employer misclassified you on purpose to not have to meet all the labor requirements, such as providing you with overtime pay, paid sick leave, insurance, and so on, or they are simply not well informed on how to properly classify individuals working for them, you should bring up this issue and demand for clear roles to be set.
It might not be easy for a person to talk to the manager or owner and point out that they are actually an employee. However, why should you miss out on all the benefits you are entitled to if your status corresponds to an employee one? This might not make the other side happy as there will definitely be some payroll taxes not paid and other payroll expenses. Nonetheless, it is best to catch and change the issue early on.
Tax implications for independent contractors
When it comes to the contractors and taxes, you should understand that no one is paying anything on your behalf in regard to payroll taxes. What we mean by payroll taxes is the Social Security tax and the Medicare tax. So, instead of having your employer pay these for you, now you are required to file all your taxes yourself. On top of that, you also have to pay federal, state, and sometimes local taxes. So, how much should you pay?
Every quarter, you would need to pay your FICA taxes. In simple words, you would calculate your net income and then calculate 15.3% of it. This would be 12.4% for the Social Security tax and 2.9% for the Medicare tax. Depending on your marital status and how you opt to be taxed, you might be able to get some tax deductions and write-offs. If you do a good job of tracking your expenses, especially mileage/vehicle expenses, you may end up paying much less.
You will also receive a 1099 independent contractor tax form from everyone who you worked for during the year and earned over $600 by mail or email at the end of January. So, if it is already February and you have not received anything from the company you worked for, you may want to contact it. Once you got your form(s), what do you do with it? These forms are kind of equivalents of W-2s, so now, it is time to file your taxes as you have the main forms necessary for this. If the project was not big enough and there was no 1099 form, it is still a good idea to report those earnings.
Pros and cons
- Contracting allows individuals to earn as little or as much as they desire. There are more possibilities to raise the level of income you are earning than with a full-time job. If you can negotiate a great deal on your own, then you might be better off as a contractor.
- Flexibility is another huge advantage of contracting jobs. Besides being able to choose the work and be in charge of the place and time this work is performed, you also have the flexibility of taking time off as necessary.
- The contract positions are more readily available, especially in an uncertain market. This makes it very appealing for people who are cutting back into the job market. Some companies even hire contractors they worked with for some time to work for them full time.
- Individuals can try themselves in a new industry or a new job type or even gain a new skill set that they did not have.
- If you are hired as an employee, you have a huge benefit in the form of job protection, unfair dismissal, health, safety, taxes, and so on. When you work independently, there are no such advantages and you have to take care of yourself on your own.
- There is only a contract or agreement that bounds you and the person or business that you are providing your services to. So, if any issues or questions arise and there is nothing in the contract on this topic, then you are on your own once again.
- You always have to be on the lookout for the next project and keep your skills and experience up to ensure that you get the project you want.
- You do not have a stable salary coming to your bank account every month, which might be important, for instance, if you want to apply for a mortgage.
- Taxes are another huge disadvantage. Although it is possible to write off and deduct a big chunk of this bill, it means that you need to do a lot of thorough bookkeeping (or at least save all the receipts) and hire a specialist to help you file your taxes.
- When you are a contractor, you need to learn all the ropes yourself as there is no one to train and teach you. Whoever hires you expects that you can get the job done without errors from start to finish. There is also no opportunity to take advantage of the educational assistance programs.
How it works
Chris works as a pizza delivery man. He delivers pizza orders on his own car for FoodToDoor, QuickEats, and Instadelivery food delivery services. He has his own ABN and regularly gets orders from more than one app on the same day. Chris can choose which deliveries he wants to make and whether he wants to take orders during the day or only in the evening, for instance.
The apps make it as simple as clicking Accept or Decline order button. Every delivery he makes is recorded in the respective app and the payment for the delivery is deposited to his account. Unfortunately, when Chris gets into an accident when delivering pizza and needs to take a sick leave, there is no one who will pay him wage replacement or his medical bills. After all, Chris is an independent contractor.
BooksTime, Inc. does not provide tax or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or legal advice. Tax and legal topics are complex and constantly changing, and the information presented here may be incomplete or out of date.
Author: Charles Lutwidge