Small Business Guides

The benefits of being
an independent contractor

6 min read

Becoming an independent contractor can give you better working conditions, more flexible hours and a higher income. But there are disadvantages, too. It's not a decision to be taken lightly, so what do you need to know first?

A different way of working

Businesses around the world are moving to more flexible employment methods in order to cut costs. Cloud computing is a driving force behind this change, and it's benefiting a particular type of worker – the contractor.

Contractors are people who work on a contract basis, not as regular employees. Each contract might span a few months, a few weeks or even a one-off piece of work. Contractors often go from one company to another in a short space of time, or work part-time for two or more companies simultaneously.

It might sound like an insecure life for the contractor, but knowing that your skills are in demand by more than one company can actually make you feel more secure.

There's a lot to think about before deciding whether the life of a self-employed contractor would suit you. Here are some important points to consider:

The definition of an independent contractor

As a general guide, the government will consider you to be a contractor instead of an employee if you:

  • Own at least part of your own business.
  • Work for multiple companies during each tax year.
  • Have specialized skills or expertise.
  • Work on a temporary, short assignment or project.
  • Work for a client for a limited period of time and not on a permanent basis.
  • Supply most of your own materials and equipment.
  • Have a client who makes the ultimate decisions about the project you're working on.

Check local rules for a clearer picture, as the guidelines vary from one country to another.

The benefits of becoming a contractor

The main advantages are that you can:

  • Become your own boss
    Contract work provides greater independence and, for many people, a greater perceived level of job security than traditional employment.
  • Maintain a good work/life balance
    Less commuting, fewer meetings, less office politics – and you can work the hours that suit you and your lifestyle best.
  • Earn more money
    Being a contractor means you get paid for every hour of work you do, at the market rate. If your skills are in demand, your income could be high.
  • Test out a new field of expertise
    Not sure if there's a market for your skills? You can dip a toe into a new industry without committing yourself to a full-time job. If it doesn't work out, you can cut your losses quickly and easily.
  • Start on a part-time basis
    This can be appealing to young people just graduating from college, or older people who want to experiment with a second or even third career.
  • Test out a company
    If you're not sure a new company is offering the right full-time employment opportunity for you, suggest first working for them as an independent contractor.

If these benefits sound appealing, you might have the right mindset and skills to become a contractor.

Plan what you will earn

Contractors often start as employees first, before leaving to work on their own. They have a good knowledge of the rates being paid and the type of work expected of them. If you're not sure what you can charge, have a look at sites such as Odesk and eLance for rates and other information.

Remember, you'll only be paid for the work you do. You usually won't be paid when you're sick or taking time off. There will be no company pension or retirement plan, no corporate healthcare package and no dental coverage.

But some people are able to do high-value work in a short space of time. Even taking into account loss of holiday pay, sick pay and other benefits, such workers can still come out ahead financially as contractors.

How far ahead? Think what you could charge per hour or per job. Then think about how much work you're likely to get. Now research the cost of providing your own healthcare insurance, sickness and time off coverage, retirement plan, equipment and so on.

Take these numbers and put them into your accounting software to forecast your likely income. Do the figures add up? Only by planning carefully will you know whether it's time to strike out alone. It may be helpful to talk to a financial adviser before making the final decision.

Only by planning carefully will you know whether it's time to strike out alone.

Balance the benefits with the downsides

There are some disadvantages to being a self-employed contractor. Perhaps the biggest is employment rights – in most countries, you won't have the same legal rights as a regular employee. Here are some things to consider when you’re a contractor:

  • You’re only paid for the work you do
    You'll have no income during temporary lulls in workload. This can be stressful, so you'll need to budget carefully.
  • You won’t have employment benefits
    Your client doesn't have to provide you with health benefits or even (in some countries) pay you the minimum wage.
  • You may not be covered by Workers Compensation or similar schemes
    It may seem unfair, but you may not be treated on an equal footing with other workers.
  • The ‘Outsider’ label
    You won't ‘belong’ to the organization you happen to be contracting for. They don’t have to invite you to company meetings or involve you in strategy discussions or planning. And some full-time employees may resent you if they think you're earning more than them.
  • You may not be covered under equal opportunity employment laws
    This varies from one country to another – some governments apply the same legislation to contractors, but many don't.
  • Taxes are not withheld and paid by your client
    This means that if you don't put money aside for your year-end tax bills, you could get into trouble. Use good quality accounting software to keep track of tax owed and the contents of your savings accounts.

Be aware that if your client incorrectly classifies you as an employee, they may be required to pay back taxes and provide employee benefits. That will cause problems for you and your client, so it's important to get it right.

How you get started

If you're ready to become an independent contractor, here are some practical steps to get you started:

  • Set up your business
    Register as a legal entity and incorporate to protect yourself.
  • Write a business plan
    Be sure to include things such as your rates, expenses and expected growth. Seriously consider hiring an accountant at this stage so that you can create a plan that’s realistic and professional.
  • Separate personal and business banking
    This makes it much easier to manage your accounts.
  • Obtain insurance
    Professional indemnity and public liability are usually the important ones.
  • Choose good quality accounting software
    Use it to track expenses, send out invoices and reduce your end-of-year tax work.

It's also a good idea to have your own standard contract, NDA (non-disclosure agreement) and services agreement for your clients to sign. Be aware that some clients may prefer to use their own documentation.

Five ways to find contract work

There are many ways of finding contract work, such as:

  1. Specialized websites
    Companies post projects for individuals to bid for on sites such as eLance and Odesk.
  2. Government-run procurement sites
    Mainly for public sector projects, these can be useful for finding contract work. Governments require several steps for you to become a supplier.
  3. Social media sites, especially LinkedIn
    Use your connections to learn what businesses are looking for – and bid when they announce invitations to tender.
  4. Your contacts
    Reach out to your friends and see if they know of anyone who needs assistance at their companies.
  5. Other contractors
    Your skills might be complementary to theirs, allowing you to form a loose consortium of contractors who can refer work to each other.

If what you make or do can be delivered online or by mail, you can broaden your search to other countries. Good accounting software will make it easy to invoice in different currencies.

Use cloud technology to help you

When you become an independent contractor, suddenly all the things that were done for you – such as administration, accounts and marketing are now your responsibility. Fortunately, there are tools to help reduce the workload. You’ll need a:

  • Simple project management and time-tracker software
    This will help you track your work by time and project, so you don't under- or over-charge.
  • Good accounting package
    Be sure to get this right, as it can form the backbone of your business.
  • Good to-do list tool
    Nobody else will manage your time for you, so you'll have to do it yourself.
  • Word processing, spreadsheet and presentation software
    Online collaborative office software suites are often free to use for small businesses, and can save you time and expense.
  • Marketing suite of apps
    Whether it's creating and maintaining your website or managing your social media presence, there are apps available to help you publicize your contractor business.

Ideally, these tools should all be cloud-based so you can access your data anywhere, anytime and on any device.

Being your own boss can be rewarding

Contract work involves responsibility, drive, the ability to act on your own, commitment and initiative. You may also have to cope with a solitary working environment at times, or insecurity about where the next job is going to come from.

But with the right skills and attitude, being a self-employed contractor can be liberating and empowering. It’s likely you’ll have more freedom than you ever had in your previous working life. And with the cloud-based software applications available today, becoming a contractor is easier now than ever.

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