here has been a lot of talk lately about who is an independent contractor and who is an employee. The rise of the gig economy has caused consumer advocates, politicians and others to reexamine the role of companies like Uber, Lyft, Instacart, Doordash, and others, and there are solid arguments on both sides. In the meantime, it is helpful to understand how the classification of your job impacts your taxes, your financial security, your retirement and your ability to earn a good living. Here are some of the key benefits and risks of life as an independent contractor.
In the meantime, it is helpful to understand how the classification of your job impacts your taxes, your financial security, your retirement and your ability to earn a good living. Here are some of the key benefits and risks of life as an independent contractor.
From when you work to how you get the job done, you have a great deal of freedom and flexibility when working as an independent contractor. Whether you give rides as a driver for Uber or Lyft, pick up groceries for Instacart or work in another capacity, you can pick and choose the jobs you take and determine your working hours.
Few traditional employees have this kind of freedom and flexibility over their working hours and conditions. If you are a self-starter who values independence, working as a contractor could be the perfect choice.
No Fringe Benefits
If you are classified as an independent contractor, you will likely not have access to things like employer-paid health insurance, group life insurance coverage, paid time off and other fringe benefits. This lack of fringe benefits could be a real problem, especially if you have to purchase health insurance on your own.
The lack of fringe benefits is less of a problem if your spouse is covered by a group health insurance plan, or if you are young and eligible for the lowest individual rates. Even so, it pays to run the numbers before you give up the security of a full-time position for the uncertainty of life as an independent contractor.
Good for Supplemental Income
If there is one thing gig work is good for it is providing supplemental income. If you need to earn additional cash to make ends meet or put money away for retirement, taking on an independent contractor gig or two could close the gap and help you be more successful.
Combining the freedom and flexibility of life as an independent contractor with the security of a full-time or part-time job gives you the best of both worlds. When you need extra cash, you can turn on the Uber app or make a few deliveries in your spare time, all without giving up your full-time career.
No Work = No Pay
There is one big downside to life as an independent contractor; if you are not working, you are not earning money. That can make budgeting difficult, especially if you do not have a full-time or part-time job to fall back on.
This big downside concerns the lack of vacation days, but it also applies to periods of illness or disability. While full-time employees can typically rely on disability insurance to provide an income while they recover, independent contractors do not have that luxury.
Generous Retirement Savings Plan Limits
One of the biggest benefits of working as an independent contractor is the relatively generous retirement plan contribution limits these self-employed individuals enjoy. Compared to their traditionally employed counterparts, independent contractors can often put away far more money, lowering their tax bills while providing for their future incomes.
If you are already maxing out your retirement plan contributions at your full-time job, taking on a side hustle could give you the opportunity to save even more. It is, of course, important to consult a tax expert before moving forward. Each person’s circumstances are different and no two tax issues are the same.
Life as an independent contractor can be taxing, quite literally. Compared to their full-time and part-time counterparts, the self-employed face higher taxes, and many new gig workers are unprepared for that reality.
When you are self-employed, you are responsible for both the employer and employee side of the taxes that pay for Social Security and Medicare, and that tax bite can be a big one. If you are thinking about working as an independent contractor, it is important to consult a tax expert before making the switch.
There is a lot of confusion over the difference between independent contractor and employee, and the distinction is often a fine one. Politicians and pundits continue to argue over what makes an individual a contractor and when certain employee-only benefits should kick in.
For those on the ground, the distinction is even more important, and getting it right is critical. Understanding the benefits and risks of life as an independent contractor can help you work smarter, earn more money and build a better future for yourself and your family.