Pros and Cons of Working as an Independent Contractor

Striking out on your own can be both risky and rewarding

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If you're the adventurous, entrepreneurial type, then working as an independent contractor might be a great career choice for you.

Independent contractors are sometimes called ICs, consultants, freelancers, free agents, or contractors. Regardless of the label, all are essentially the same in practice, including a self-employed designation when it comes to U.S. tax purposes. That's because the Internal Revenue Service (IRS) has only two distinctions: an independent contractor or an employee.

Being an independent contractor has its advantages over being an employee. However, there are drawbacks to being an independent contractor as well. It's important when considering independent contract work to understand the pros and cons of working as an independent contractor.

Key Takeaways

  • Advantages of being an independent contractor over being an employee include more control since you're your own boss.
  • You might earn more as an independent contractor, and the tax benefits can include deducting your business expenses.
  • The drawbacks to being an independent contractor include more responsibility.
  • Independent contractors must fund 100% of their Medicare and Social Security taxes, health insurance, and retirement.
  • You may also be responsible for buying the tools and equipment needed for your profession.
  • You are your own boss

  • Greater control over the work you accept

  • You can earn more money

  • Tax benefits from expense deductions

  • Must withhold your own FICA taxes

  • Must buy their own health insurance and benefits

  • Must buy your own tools and equipment

  • May need a federal and state tax ID number

Pros Explained

  • You are your own boss. As an independent contractor, you are your own boss, which for some, is the main reason why they decide to become a freelancer or independent contractor. If you're a contractor who works out of a client's location, you might work shoulder-to-shoulder with that company's employees, managers, and bosses. However, these folks are not your supervisors; they are your clients and, as such, may not direct your work as they would with an employee.

  • Greater control over the work you accept. Your clients can, however, require certain results in return for the fees they pay you. While you and your client will negotiate on the final product (and the pay for that final product), you alone decide when, where, and how the work is done. According to the Common Law Rules enforced by the IRS and the Fair Labor Standards Act issued by the Department of Labor, the difference between an employee and a contractor largely hinges on the degree of control and independence granted by the client.

  • You can earn more money. As an independent contractor, you may earn more money than as an employee. Companies might be willing to pay more for independent contractors because the companies don't have the enter into expensive, long-term commitments or pay health benefits, unemployment compensation, Social Security taxes, and Medicare taxes.

  • Tax benefits from expense deductions. Independent contractors also may deduct more business expenses than employees typically can claim. Unlike employees, independent contractors are required to withhold their own federal, state, and local taxes.

Cons Explained

  • Must withhold your own taxes. Employers like contractors because they can avoid paying for taxes and benefits, meaning those costs fall entirely on independent contractors. Contractors must withhold their own federal, state, and local taxes. They may also have to submit quarterly estimated taxes to the IRS.

  • Must pay for their own health insurance and benefits. In many cases, contractors are not eligible for state unemployment benefits because they're self-employed and must fund their retirement accounts. Health and liability insurance rates for self-employed individuals are usually higher than the group rates employers can secure for their employees. Some clients may require you to carry liability insurance.

  • Must buy your own tools and equipment. Independent contractors typically provide their own tools. Companies generally can't reimburse independent contractors for out-of-pocket expenses, so you should consider those expenses when determining your rates. If your clients provide the tools, one of the enforcing agencies might penalize them for misclassifying you as an independent contractor when you should have been classified as an employee.

  • May need a federal and state tax ID number. Because of the issues that can arise around whether a worker is an employee or a contractor, some skittish employers won't hire contractors who use their social security numbers as taxpayer IDs. If an employer reports the earnings of a contractor under that individual's social security number, it can trigger a red flag to the IRS, which might undertake an audit under the suspicion that the employer is misclassifying employees as independent contractors to avoid withholding taxes and to provide benefits.

    To bypass the problem, obtain a federal employer identification number (EIN) and submit that in place of your social security number. A state taxpayer ID (if required) can save you money by allowing you to buy items at wholesale and free of sales tax, provided you intend to resell the merchandise. Your local Small Business Administration Office can help you get started with this and other business matters for free.

How To Succeed as an Independent Contractor

Setting up your own business as an independent contractor requires an investment of time and energy, but the risk can pay off handsomely. For those with a creative and entrepreneurial spirit, the rewards will be more than just monetary.

To help you network, gain expertise, and receive discounts on insurance and other self-employment expenses, consider joining professional organizations such as the National Association for the Self-Employed. You'll also find a bevy of resources on the U.S. Small Business Administration's website.

When you’re starting, apply to agencies that can connect you with contract work. Remember, though, that these agencies may withhold taxes and collect other deductions from your paychecks, depending on your working relationship with the firm. Agencies may also charge you a commission, which will reduce your compensation (although you can deduct it on your tax returns).

The Bottom Line

Being an independent contractor can be rewarding since it offers you the ability to be your own boss, choose which clients to work for, and allow you to work from home. However, being an independent contractor can come with more responsibility. You must fund your Social Security and Medicare taxes. Also, you might need to pay for your own tools and equipment as well as establish a federal and state tax ID number.

Frequently Asked Questions (FAQs)

Is it worth it to be an independent contractor?

Being an independent contractor has its rewards, and whether it's worth it for you depends on the pros and cons. As an independent contractor, you're your own boss, meaning you have more control, but you also have more responsibility.

What are the disadvantages of being a 1099 employee?

Some of the disadvantages of being a 1099 employee include you must fund 100% of your Medicare and Social Security taxes, health insurance, retirement savings, as well as any tools and equipment needed for your profession.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Independent Contractor (Self-Employed) or Employee?"

  2. U.S. Department of Labor. "Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)."

  3. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)."

  4. Internal Revenue Service. "Estimated Taxes."

  5. National Association for the Self-Employed. "Frequently Asked Questions."

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