The benefits of being an independent contractor
Independent contracting comes with plenty of benefits, but it's not all sunshine and rainbows. So what does it offer?
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, you will be considered 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 specialised 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
There are a number of advantages to being a contractor.
Be 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 Upwork 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 about 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.
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:
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 organisation 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: Check out our guide on starting a business for tips on getting registered, choosing a business structure, budgeting and more.
- 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. Find out more about small business insurance.
- 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 several ways of finding contract work.
- Specialised websites: Companies post projects for individuals to bid for on sites such as Upwork
- 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
- Social media sites, especially LinkedIn: Use your connections to learn what businesses are looking for – and bid when they announce invitations to tender
- Your contacts: Reach out to your friends and see if they know of anyone who needs assistance at their companies
- 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 the following:
- 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 publicise 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.
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
Download the free invoice template
Fill in the form to get a blank invoice template as an editable PDF, with how-to guide. There’s a version for GST and non-GST businesses.
Start using Xero for free
Access all Xero features for 30 days, then decide which plan best suits your business.
- Safe and secure
- Cancel any time
- 24/7 online support