More and more workers are moving into roles as independent contractors (ICs) with the rise of the gig economy and the expanding utilization of ICs by hiring organizations. There are many benefits to being an IC, including the flexibility that comes with being one’s own boss. However, there are many serious considerations to ponder when striking out on your own, so as to avoid the potential downsides of IC work. Here are some tips for protecting yourself if you elect to do contract work.
Be sure you’re properly classified. Ignorance, as the old saying goes, is no excuse for the law. Just because a business hires you as an independent contractor doesn’t mean that you are necessarily truly classified as such. So, understand the laws and regulations governing proper IC classification. The IRS and Department of Labor publish detailed guidelines on what it takes to classify a worker as an IC.
Beware of “Scope Creep” on the part of the employer. Once you’re schooled on the IRS and DOL guidelines, use that knowledge to push back against any hiring authority that begins to press you to act in ways that could nullify your IC classification. ICs must control their own schedule and not be made to conform to standard hours dictated by the employer. Stipulate your own work schedule and stand by it. Don’t allow an employer to make you work for them exclusively. ICs must be able to show they serve more than a single client in order to classify properly.
Be aware of your tax obligations. Unlike W2 wage earners who’s taxes are deducted from their pay by the employer, an IC is paid the entirety of his earnings directly. It is your responsibility to render all required taxes to the appropriate taxing authorities. That means you’re on the hook to report to the IRS and state and to pay 12.4% of your earnings (up to $127,000) in Social Security tax. You’ll also have to pay 2.9% in Medicare tax. Failure to report and pay these taxes on your earnings as a contractor can lead to stringent penalties and interest.
Protect your rights with solid contract documentation. As an IC, the employer is not required to extend to you most of the legal protections afforded to W2 employees. The Fair Labor Standard Acts, Title VII, the Family Medical Leave Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act and state workers’ comp laws are only a sampling of the many legal protections you won’t enjoy as an IC. As such, an employer could discriminate against you on the basis of race, gender or origin. They could deny accommodation of your religious beliefs or disability. They could pay you less than minimum wage and deny overtime. All within the bounds of the law. The solution for an IC is to leverage solid contract documentation. Make sure before you accept the work, that you prepare and execute a detailed written contract that specifies your pay rate and other protections. If the hiring authority breaks the agreement, you’ll have legal recourse to try and recover what you’re entitled to.
Plan for your own benefits. As an IC, you’re barred from participating in some of the important benefits provided to a W2 worker. Things like healthcare coverage, paid time off, retirement benefits and others. So, it is important to bake the cost of these benefits into your pricing. Budget accordingly to ensure you have some money to put into an IRA for retirement. You’ll also want to make enough to cover your own medical, dental and vision. You should also investigate buying private disability coverage so that if you’re injured on the job and cannot work for a period of time, you won’t be left with no income.
If it sounds like a lot more work to administer your own workforce management processes than to simply be an employee, you’re right – it is. However, the benefits of independence can often be well worth the effort. The important thing is to be clear-eyed about what it takes to be an IC so that you’re protected.