Advantages and Disadvantages of Being an Independent Contractor

Working for yourself as an independent contractor gives you the freedom you always wanted when you were an employee, and possibly even the chance to earn more money. However, being your own boss can have downsides, too. Here are the pros and cons of independent contracting.

At some point in our lives, almost all of us dream of breaking the shackles of employment and becoming our own boss. But before making such a big decision, it’s essential to weigh up the advantages and disadvantages that becoming a contractor will bring.

Being your own boss is not all mid-morning croissants and frothy cappuccinos. The reality is that you could end up working longer hours for less. And then there are all those additional tax and accounting obligations you have to meet. You could find that being your own boss is a lot harder than you first thought.

Hopefully, the below snapshot of the advantages and disadvantages of being a contractor will give you plenty of food for thought before you make the decision to go it alone.

The advantages of being a contractor

Freedom and flexibility

The freedom to choose what contracts you want to work on, which you’d rather leave and even when you work is probably the biggest benefit of being a contractor. Although contracts are for a fixed time and are often extended, you can pick and choose whether you work with the same company for the long term, or simply move onto another contract.

You can earn more

One of the first things people think about when considering life as a contractor is the financial benefits this new route could bring. In many cases, the average contractor will earn more than they would as an employee. This is because much of an employee’s pay is actually made up of benefits, such as pension contributions and subsidized medical insurance, which contractors do not receive. As a result, contractors can be paid up to double the rate of a full-time employee. This will depend on your level of skills, the industry you work in and the location. 

Tax benefits

In the UK, independent contractors can operate through a limited company as opposed to an employee. This can provide significant tax benefits as contractors can pay themselves in the most tax efficient way i.e. by taking a small salary and more dividends. This reduces the amount of National Insurance contributions contractors have to pay.

In the US, although an employee is likely to enjoy better benefits than a contractor, they will not have the same tax advantages. An independent contractor can also write-off all reasonable and necessary business expenses.

The disadvantages of being a contractor

Extra administration

There are a number of additional burdens contractors have to deal with. This includes completing and filing tax returns and annual accounts accurately and on time. Contractors also have to keep a track of their expenses. There are specialist contractor accountants who will take care of these obligations for you, but that is an additional expense that’ll eat into your earnings.  

No guarantee of work

Life as a contractor is not all plain sailing. If you predominantly work short-term contracts, you have to make sure you are always on the lookout for that next job. The reality is that there is no guarantee you will find work straight away, so it’s a good idea to keep significant savings in case the work dries up.

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Limited job security

Most contracts will only run for a limited period of time, and in some cases, depending on your terms, they can be removed with very little notice. Typically, this notice period will be a lot shorter for contractors than employees in the equivalent role. There are also no financial safeguards to fall back on such as sickness or redundancy pay. Generally as a contractor, if you’re not working, you’re not earning.

Article provided by KPMG Small Business Accounting, specialist accountants for contractors and small businesses.

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