In the business world, you either work as an employee or independent contractor (IC). Most of us have a pretty firm idea of what an employee is, but what is an independent contractor? Independent contractors are defined as “people who contract to perform services for others, but aren't legally employees. … ICs may call themselves by a variety of names — freelancers, consultants, the self-employed, entrepreneurs, or business owners.” Sometimes the ability to conclusively define a worker as either an employee or a contractor becomes murky, depending on the circumstances. See Independent Contractor or Employee: How Government Agencies Make the Call and Working With Independent Contractors: Avoiding Classification Problems for further discussion on this topic. In this article, we discuss five questions that you should ask yourself before deciding to become an independent contractor.
The primary advantage to being an independent contractor is autonomy. As your own boss, you can charge your own rates, fix your schedule, choose your clients, and make your own decisions. The key is flexibility. Also, because contractors are typically hired for a specific job, the client and the contractor can usually part ways upon completion. Projects might last for a few hours, weeks, or months, but there is a sense of freedom in knowing that you can readily move on to a fresh assignment.
It is advisable for you to perform all of your company’s services pursuant to a written independent contractor agreement (an I/C Agreement). You should take the time to create a form I/C Agreement that you can use repeatedly, which spares you from having to create an agreement from scratch for every new client (see Put Your Independent Contractor Agreement in Writing for more information on I/C Agreements). Another benefit of being a contractor is that your boilerplate I/C Agreement can include terms and conditions that you have already prepared and approved and are most advantageous to you. While you can expect for some clients to request certain modifications to their particular I/C Agreement, you can always have the comfort of starting every negotiation with favorable contract terms. For example, as further discussed below, your form I/C Agreement could include provisions regarding prepayments (deposits), a guaranteed term, or specific conditions for termination. It would be up to the client to raise an objection and insist on having any of these terms removed.
Being an independent contractor also gives you an advantage with respect to intellectual property matters. Generally, employees automatically assign any intellectual property rights in their work product to their employer. Conversely, independent contractors are typically considered to be the authors and owners of the work they produce for their clients, unless the client and the contractor have a written agreement that stipulates otherwise. For further discussion on how employers might seek to obtain intellectual property rights in your work product as a contractor, see How to Protect Your Intellectual Property Rights in Works Created by Contractors.
As an independent contractor, you are not entitled to any employee benefits unless you bargain for such benefits in a written agreement between you and the client (in other words, you can include your preferred benefits in the terms of your I/C Agreement). Absent any written agreement with the client that provides otherwise, your independent contractor status will cause you to forego each of the following standard employee benefits:
As an independent contractor, you also generally can’t sue a client for employment discrimination based on national origin, color, religion, or gender; however, you can still bring a suit for racial discrimination. Contractors also can’t sue for wrongful termination unless your I/C Agreement includes a minimum contract term or certain conditions to termination.
Most individuals or companies hire independent contractors because they expect them to have a particular expertise. This saves clients the time and money of having to train employees to do the same work that a contractor can do more immediately and proficiently. It’s because of this specialization that clients are commonly willing to pay contractors at higher rates than they would their employees for the same task. Clients expect contractors to walk through the door with the required expertise to readily and competently complete the task at hand, with little to no supervision. In fact, the more training and supervision that a client gives to a contractor, the more that contractor starts to look like an employee to government agencies. As a contractor, you should not only have the requisite skills, but also an established, efficient methodology for completing the task at hand.
Being an independent contractor means that you eat what you kill. In other words, unless you and your client have an I/C Agreement that guarantees a certain volume of business, you will only generate income if you can motivate yourself to regularly attract new business clients. Unlike an employee, who might have a salary or some other form of guaranteed compensation, contractors must depend on themselves and their contact network for their livelihood.
While getting clients is one thing, completing your projects is another. Clients will expect for tasks to be fulfilled thoroughly and within the agreed-upon time frames. As a contractor, you must set realistic goals, and also generate enough goodwill with clients so that if you require an extension of time for a particular project, they will graciously grant you a bit of leeway. It’s all about performing consistently and managing expectations. Once again, as your own boss, you are responsible for motivating yourself (and your team) to complete assignments competently and in a timely manner, particularly if the client has given you a cash deposit for the project. On a related note, one of the most problematic missteps you can make as an independent contractor is to accept a deposit from a client, expend those funds, and then fail to adequately perform your duties under the contract.
As an independent contractor, you must be ready to personally satisfy (or effectively delegate) a number of administrative responsibilities. You’ll be required to maintain all client records, including all I/C Agreements and any supplements or amendments. You’ll be responsible for the calculation, collection, and payment of all Social Security, Medicare, and other government taxes, in addition to the completion and filing of all relevant tax documentation (some of which must be obtained from your clients), on behalf of you and perhaps your workers. Furthermore, you will have to manage any health insurance or other benefit policies for you or your agents.
For all of the administrative tools you need to work as an independent contractor, including sample I/C Agreements, see Consultant & Independent Contractor Agreements and Working as an Independent Contractor.
As a final matter, you should note that until you can answer “yes” to last three questions above, you should definitely hold off on becoming a contractor until your situation changes. For more general information on being an independent contractor, see Self-Employed Consultants & Contractors and Hiring Independent Contractors FAQ.