In general, the term freelancer or independent contractor are interchangeable. A small nuance in the definition is that independent contractors tend to work with one client for a longer duration on a project. Either way you name it, an independent contractor is a good way to make top dollar using your talent while remaining your own boss. Whether you are a writer, a marketing consultant, a software developer, or an artist, working on your own from home or at a shared space, gives you the opportunity to be your own boss without having to work under someone’s thumb.
What are the challenges of being an Independent Contractor?
The challenging side of being an independent contractor or freelancer is keeping all the laws straight and making sure that big brother gets his cut. Without an accounting department and an administrative team, you’ve got to make sure you are following the laws.
The most significant setback that comes along with freelancing is lack of protection under the law. If you are an employee, the amount of protection you get under the law is significantly more than it is for freelancers.
So, while you may make more money as an independent contractor, the workplace protection that you receive will be considerably less than it would be if you were an employee.
When hired as a freelancer, here are some things you need to understand, so you don’t get taken advantage of.
What is the Difference Between Independent Contractor and a Temp?
The difference between an Independent Contractor and a temp is that As a freelancer or independent contractor, you are an entrepreneur of yourself; the law treats you as if you are a small business. In the law’s eyes, you are not an individual working for another individual. You are a business working for a client. In short, you are not an employee, you are a business owner.
A temp, on the other hand, works directly for an agency and is paid by said agency. Paychecks and taxes are taken directly from checks. Benefits, such as workers compensation, is available to temps, but not to independent contractors because an independent contractor is viewed as a business and not a person.
How to Determine Independent Contractor Status?
Determining independent contractor status can be tricky. Companies often prefer to hire independent contractors instead of bringing an employee on staff to do work for them because it’s much less expensive. Companies don’t pay social security and unemployment insurance costs when they hire contract workers. So, they save a significant amount of money.
An easy way to determine independent contractor status is to ask yourself, “Do I treat the person I am working for as a boss or as a client?”
If you answered, “Client,” you are likely an independent contractor. If you answered, “Boss,” you are either an employee, or you are skating in a grey area. The next question you can ask yourself is, “Do I have multiple clients and do I consider myself self-employed?”
Again, if you said, “Multiple clients and self-employed,” you are a freelancer. If you believe you are working for a boss and you are being called an independent contractor, you might want to look into these two tests from the IRS and DOL.
How to Pay Your Own Taxes as an Independent Contractor
Paying your own taxes as an independent contractor can be painful. As an independent contractor you pay social security and Medicare twice. As a gig worker, you pay:
- 12.4% to Social Security
- 2.9% to Medicare
When you are hired on staff as an employee, the business you work for is required to match your Social Security and Medicare contributions. So, you pay 6.2% to Social Security and 1.45% to Medicare, and your employer pays the same.
TIP: A good rule of thumb is to put back 25%-30% of everything you make on a job for tax purposes.
You also need to remember that you need to pay your taxes quarterly. You do this by:
- April 17
- June 15
- September 17
- January 15
Do Independent contractors get Employee Protection?
Unlike employees hired to work for a business, independent contractors are not protected under employment laws. The trade-off for flexibility and freedom is the lack of protection.
Sadly, that means that a client could possibly discriminate against you because Fair Labor Standards, Title VII, the Family Medical Leave Act, the Americans with Disabilities Act, the Age Discrimination in Employment Act and state workers’ comp laws are not in your corner as an independent contractor. And, in some cases, people walk away after you do a job without paying you.
Tip: what you need to keep in mind is that the contract is key. The contract you create between you and your client needs to be airtight. The only rights you will have if something goes wrong is what’s written into the contract you negotiate.
Since you can not turn to government agencies to help you if something goes wrong, you will need to work within the private sector and hire a lawyer.
There are lots of great attorneys out there who specialize in helping independent contractors. So, make sure your attorney hooks you up with a solid contract you can tweak for each job. This way you are always protected.
What is an independent contractor? You get to make your own hours, and you can pick and choose who you work for and what you get paid.
The downside is that you need to make sure you protect yourself. That means getting in contact with the right attorney to help you get everything in order. It will cost you a few bucks up front, but the savings you gain by being protected in every nuance of freelancing makes it well worth it.
Written by Susan Ranford. Susan is an expert on job market trends, hiring, and business management. She is the Community Outreach Coordinator for New York Jobs. In her blogging and writing, she seeks to shed light on issues related to employment, business, and finance to help others understand different industries and find the right job fit for them.