Advantages of Working as an Independent Contactor

There are many rewards for being an independent contractor that regular wage earners may never benefit from. You're your own boss When you're an IC you're your own boss, with all the risks and rewards that entails. Most ICs bask in the freedom that comes from being in business for themselves. They would doubtless agree with the following sentiment expressed by one IC: "I can choose how, when and where to work, for as much or little time as I want. In short, I enjoy working for myself." ICs are masters of their economic fate. The amount of money you make is directly related to the quantity and quality of their work. This is not necessarily the case for employees. ICs don't have to ask their bosses for a raise, they go out and find more work. Moreover, since you're normally not dependent upon a single company for your livelihood, the hiring or firing decisions of any one company don't have the impact on you they have on employees. An IC explains: "I was downsized six years ago, and chose to start my own company, rather than sign on for another ride on someone else's roller coaster. It's scary at first, but I'm now no longer at the mercy of one entity." You may earn more than employees You can often earn more as an IC than as an employee in someone else's business. For example, an employee in a public relations firm decided to become an IC when she learned that the firm billed her time out to clients at $125 per hour while only paying her $17 per hour. She charges $75 per hour as an IC and makes a far better living than she ever did as an employee. According to The Wall Street Journal, ICs 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 ICs' Social Security taxes, pay unemployment compensation taxes, provide workers' compensation coverage or employee benefits like health insurance and sick leave. Of course, how much you're paid is a matter for negotiation between you and your clients. ICs whose skills are in great demand may receive far more than employees doing similar work. You'll probably pay fewer income taxes Being an IC also provides you with many tax benefits that employees don't have. For example, no federal or state taxes are withheld from your paychecks as they must be for employees. Instead, ICs 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, 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 ICs as compared with employees. Even more important, you can take advantage of many business-related tax deductions that are limited or not available at all for employees. When you're an IC, you can deduct from your income tax any necessary expenses related to your business so long as they are reasonable in amount and ordinarily incurred by businesses of your type. This may include, for example, office expenses including those for home offices, travel expenses, entertainment and meal expenses, equipment and insurance costs and more. In contrast to the numerous deductions available to ICs, an employee's work-related deductions are severely limited. Some deductions available to ICs may not be taken by employees -- for example, the cost of commuting to and from work is not deductible by an employee but may ordinarily be deducted by an IC who has a main office separate from that of a client. Even those expenses that are deductible may only be deducted to the extent they exceed 2% of the employee's adjusted gross income. This means that most employment related expenses cannot be fully deducted. ICs can also establish tax advantaged retirement plans such as SEP-IRAs and Keogh Plans. This enables them to shelter a substantial amount of their income until they retire. Because of these tax benefits, ICs often pay less tax than employees who earn similar incomes.