What are the benefits of being an independent contractor?

What are the benefits of being an independent contractor?

You’re your own boss

You decide who to work for, when to work and how to work. Many Independent Contractors report that the increased freedom they enjoy is the greatest benefit of being an Independent Contractor.

You may be paid more than employees

According to The Wall Street Journal, Independent Contractors are usually paid at least 20% to 40% more per hour than employees performing the same work. This is because hiring firms don’t have to pay half of Independent Contractors’ Social Security taxes, pay unemployment compensation taxes, provide workers’ compensation coverage or employee benefits like health insurance and sick leave. All these items add at least 20% to 30% to employer payroll costs. Independent Contractors are supposed to pay for these things out of their own pockets and need to be paid more than employees to do so.

Of course, exactly how much you’re paid is a matter for negotiation between you and your clients. Independent Contractors whose skills are in great demand may receive far more than employees doing similar work.

No federal or state tax withholding

Another advantage of being an Independent Contractor is that no federal or state taxes are withheld from your paychecks as they must be for employees. Instead, Independent Contractors normally pay estimated taxes directly to the IRS four times a year. This means you can hold on to your hard-earned money longer without having to turn it over to the IRS. Moreover, if you’re an Independent Contractor, it’s up to you to decide how much estimated tax to pay, but there are penalties if you underpay. The lack of withholding and control over estimated tax payments can result in improved cash flow for Independent Contractors as compared with employees.

Increased business deductions

Finally, when you’re in business for yourself you can take many tax deductions that are limited or not available at all for employees. As an Independent Contractor, you can deduct from your income tax any necessary expenses related to your business provided that they are reasonable in amount and ordinarily incurred by businesses of your type. This includes, for example: office rent and other expenses including those for home offices, travel expenses, entertainment and meal expenses (subject to limitations), equipment and insurance costs and more. In contrast, an employee’s work-related deductions are severely limited.

Adapted from Wage Slave No More: Law & Taxes for the Self-Employed, by Stephen Fishman.

Learn more about Independent Contracting – Common Questions

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