What are the drawbacks of being an Independent Contractor?

What are the drawbacks of being an Independent Contractor?

Despite the being an Independent Contractor is no bed of roses. Following are some of the major drawbacks and pitfalls of being an Independent Contractor.

No Job Security

If Independent Contractors don’t have business, they don’t make any money. Employees, on the other hand, are paid as long as they hold their jobs, even if their employer’s business is slow.

However, many would argue that there is no such thing as job security in modern America. According to The New York Times, more than 43 million employee jobs have been erased from the U.S. economy since 1979, and the trend continues.

You Must Pay Self-Employment Taxes

Unlike employees who have half of their Social Security and Medicare taxes paid by their employers, Independent Contractors must pay all their Social Security and Medicare taxes themselves. These are called self-employment taxes. The self-employment tax rate is 12.4% of an IC’s earnings up to the taxable limit for Social Security and a 2.9% Medicare tax on all Independent Contractor income.

To find out more about self-employment taxes, visit the IRS Introduction to Self-Employment Tax (http://www.irs.ustreas.gov/prod/forms_pubs/pubs/p533in.htm).

No Employer-Provided Benefits

Employers usually elect to provide their employees with health insurance, paid vacations and paid sick leave. More generous employers may also provide retirement benefits, bonuses and even employee profit sharing.

When you’re an Independent Contractor you must provide your own health insurance, often at much higher rates than employers are able to pay. Time lost due to vacations and illness comes directly out of your bottom line. And you must fund your own retirement.

No Unemployment Insurance

Benefits Independent Contractors also don’t have the safety net provided by unemployment insurance. Hiring firms do not pay unemployment compensation taxes for Independent Contractors, and Independent Contractors can’t collect unemployment when their work for a client ends.

No Employer-Provided Workers’ Compensation
Employers must generally provide workers’ compensation coverage for their employees. If you’re an employee and are injured on the job, you’re entitled to collect workers’ compensation benefits even if the injury was your fault. Hiring firms do not provide workers’ compensation coverage for Independent Contractors. If a work-related injury is an Independent Contractor’s fault, he or she has no recourse against the hiring firm.

Few or No Labor Law Protections

A vast array of federal and state laws protect employees from unfair exploitation and discrimination by employers. For example, federal law protects workers who wish to unionize and requires many workers to be paid time and one-half for overtime.

Few or none of these laws apply to Independent Contractors. Independent Contractors are not entitled by law to time and one-half for overtime. And hiring firms can refuse to deal with Independent Contractors who belong to a union or who express support for a union.

Risk of Not Being Paid

If you’re an employee, you have to be paid by your employer-even if its clients or customers fail to pay. When you’re an Independent Contractor you bear the risk of loss from deadbeat clients. Many Independent Contractors have horror stories about clients who refused to pay them.

Personal Liability for Business Debts

Finally, if you’re a sole proprietor or partner in a partnership, you are personally liable for your business debts. An employee will lose his or her job when the employer’s business fails, but he or she owes nothing to the employer’s creditors. An Independent Contractor whose business fails could lose everything he or she owns.

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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