If you are exploring a new work role as an independent contractor, or already have your own freelance business, there are key questions that come up about this expanding mode of offering your skills and services to businesses. Being a contractor or freelancer is quite different from a traditional employee role, and carries a higher degree of autonomy and responsibility for your work product and quality.
Your choice to be an independent contractor is affected by many factors, including the agreements that you sign, client project parameters, skills that you offer and even governmental regulations. All of these variables can be a challenge for those just starting out as a contractor, but we do have some insights to help get you started.
Here are 10 frequently asked questions about being an independent contractor:
1. How long can I work for a client or employer?
The length of time that you can work for a single client is only limited by either your agreement with them (written or verbal) or their need for your skills and abilities. Generally, it is better to have a few long-term clients that you develop rapport with, rather than always having to look for new projects.
One thing to keep in mind is that if you have only one long-term client, you could begin to look like a ‘stealth employee’ rather than a contractor. Maintain your independent status, send invoices and maintain other clients if possible. Some clients may resist engaging you long term if they are worried about you wanting to claim employee benefits or back pay, so be sure to conduct yourself as an independent business at all times.
2. Do I have employee benefits as an Independent Contractor?
The answer is no. As an independent contractor, you are self-employed and do not have any right to employee benefits. You must provide your own health insurance and retirement contributions, as well as pay self-employment or payroll taxes (both employee and employer amounts).
The problem is that many new contractors are used to having employee benefits like sick pay or workers’ compensation, and are not prepared to deal with illnesses or accidents. If you miss work as a contractor, you don’t get paid and it could affect your client relationship as well if a deadline is missed.
3. Are there risks to being an independent contractor?
The primary risk of being a contractor is the same as any business: not enough clients or customers and fluctuations in income. You have to anticipate that there will be dips in income and work, so if possible, you should keep marketing yourself even if you are currently busy.
Don’t rely too much on just one client, because at any time they could change their business model or simply reduce their needs in your area of service. Then you will have to start all over again looking for new income opportunities.
4. Am I an employee or independent contractor?
This question comes up frequently and it does depend on how the work relationship and payment is structured. There are several high profile legal cases now where contractors are claiming employee status, and the core issue is that of control over work activity.
Simply, if you control your own work hours, methods and are paid on a project basis, then you are a contractor. If the company controls your work and pays you a fixed amount on a regular basis, you are most likely an employee. The main issue that comes up is where a business uses contractors, but then attempts to impose ‘employee-like’ controls while avoiding the expense of employee benefits.
5. How do I get paid as an independent contractor?
If you are working on a project basis, then you can either be paid upon completion, or ask for some type of advance for a percentage of the amount due. In either case, you will have to submit an invoice, and state the terms of payment clearly.
Methods of payment vary, but for most some type of third party payment system is easiest. Paypal is one popular option, but ACH or wire bank transfers also work well. Your agreement with the client should specify who pays the fees for these payment methods. You can also accept checks, but this is a slower and less secure method of payment.
Freelance web platforms offer an escrow system for payment from clients that engaged you through the website, but some of these sites want up to 20% of the fee paid as a commission. You can also contact us at ContractorTaxation to help you with setting up a secure payment system with your clients.
6. What is an independent contractor agreement, and do I need one?
An independent contractor agreement is basically the contract between you and the client that defines the work project, parameters of quality, deadlines, payment amount and methods to resolve any disputes. Essentially, it a commercial, business to business agreement that is legally enforceable in the event of a dispute.
With new clients, it is a good idea to insist on a formal written agreement to avoid any misunderstanding. This also signals to the client that you take your work seriously and are prepared to approach the job as a professional. Freelancers can encounter problems or delays with payment, especially if the client is not satisfied and an agreement can help avoid this type of issue.
If you have an existing long-term relationship with a client, you may not need an agreement for every project offered, but at a minimum you should confirm the details in an email to make sure the job is understood completely. In particular, you will want to include the payment amount, project specifics and deadlines.
7. Are there benefits to being an independent contractor?
There are many benefits and advantages to being a contractor, including:
- Ability to direct and manage your own work load and schedule
- Flexible hours and project selection
- More deductions from income to reduce your tax burden
- Can source clients from multiple locations across regions or countries
- Ability to expand the type of services that you offer depending on your skills and experience
- You can take vacations when you want to and for as long as you like
These are only a few of the benefits, and illustrate why freelancing is growing in popularity as a truly independent work mode.
8. Do I have to pay taxes as an independent contractor?
Yes, you have to pay state and federal taxes just like any business, but usually as a sole proprietor which has the same tax rates as individuals (rather than a corporate rate). In some countries such as the US, you are liable for both income taxes and self-employment tax. This is offset somewhat by the fact that as a business you can deduct many expenses that employees cannot.
Depending on your taxable income, you may need to make regular estimated tax payments during the year (just like employee tax withholding from the paycheck). Tax compliance is important and you should avoid the temptation to under report income. A better strategy is to maximize legal business deductions, perhaps with the help of an accountant.
9. What type of work occupations are best for an independent contractor?
Contractors can work in almost any field where there is demand for on-call or project based services. Contracting does lend itself naturally to occupations such as IT support, creative and design work, professional services (legal, accounting, etc.), consulting and customer service roles.
The classic contractor roles in the construction industry or other skilled trades are still viable occupations to work independently, although the physical nature of the work requires more attention to insurance and liability issues for the contractor.
With the reach of the internet and increasing number of business communication and collaboration apps, remote work is expanding as well. You are no longer limited to your immediate geographical area, especially if your role does not require you to be physically present such as with informational or technical occupations.
10. How do I find clients if I am just starting out?
One of the challenges with working as a contractor or freelancer is finding work projects and clients. There are several popular avenues such as freelance web platforms, Independent Contractor agencies and business social media outlets (LinkedIn, Facebook).
One of the best ways to start is to contact former employers who already know your talents, and make them aware that you are available for contract work. Experienced freelancers can also contact former clients and let them know that you are still a resource when they need you.
Working as an independent contractor can be extremely rewarding, and we can help you manage your client projects and payments to ensure your success. Please contact us with your questions and for more information on how to get started.