Are you confused about what it means to be an independent contractor?
Maybe you are working for someone else but you want to start your own business. Or maybe your employer has suggested that you could work from 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.
- No tax withholding. Some people consider it a benefit that the payments you receive as an independent contractor don’t have income tax withheld. However, 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. Always check what is and is not an ‘approved expense.’
- No guarantee of income. Being independent also means that you don’t get a regular pay cheque. 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.
- No benefits. One of the main reasons people stay employed is to have employer-paid benefits such as private healthcare. If you choose to have health insurance, you will need to pay for it.
- 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.
Tip: An independent contractor can have a contract, so get a written contract from each person or business you work for. Having this document spells out ‘what happens when.’ It can settle many disputes before they start, and you can take a contract to court to get paid, if necessary.
Deciding whether to become a contractor is a critical decision which can affect your future wealth creation and your current living standards. If you need further guidance on the benefits and drawbacks of being an independent contractor, we’d be delighted to help. Call us on 020 8530 0720 for an informal chat or to arrange a meeting.