Being your own boss sounds great, right? Make your own hours, nobody to tell you what to do, no more office politics. While being an independent contractor, such as a consultant or freelancer, can offer many life-changing benefits over a regular day job, you might want to think twice before you take the plunge. Here are seven things to consider before you leave your day job to become a contractor.
- You pay all the FICA taxes.
When you work for somebody else, they pick up half of the Social Security and half of the Medicaid tax collected by the federal government. These are called FICA taxes. When you work for yourself, you’re responsible for the entire FICA tax amount, which is currently 15.3%. That can take a big chunk out of your income.
- You may have to buy your own health insurance.
Working for someone else often includes the benefit of health insurance coverage. Although insurance copays have risen dramatically in recent years, it’s still usually cheaper than going out and getting insurance on the open market. If contractors are lucky, they can get insurance coverage from their spouse’s plan. If not, they may face major costs here.
- Office expenses are all yours.
As a contractor, you may likely need to set up your own office. Whether you rent office space or use part of your home, there are significant costs associated with an office. Furniture, equipment, office supplies, utilities, even coffee – these expenses can really add up. Fortunately, they’re also deductible expenses on your federal tax forms.
- There’s a lot you don’t get paid for.
Back at your old job, you probably got paid for working the whole day, even if, well, you maybe weren’t always working. Maybe you were taking a break or stopping by a colleague’s cubicle for a chat. Maybe you were even taking a hard-earned vacation or enjoying a national holiday. You got paid for all that down time. When you work for yourself, you only get paid for the actual time you put in to accomplish a project or assignment.
- It can be lonely.
Working as an independent contractor may mean that you work alone for large periods of time. Some people thrive off this environment, others not so well. If you’re the kind of person who needs to be around other people most of the day, then contracting may not be for you.
- You may not get paid for awhile.
A day job includes the luxury of getting a paycheck on some sort of regular basis. A contractor must often wait, sometimes months into the future, to get paid. And if you think adding a penalty for late payment to your clients’ invoices always solves this problem, you may want to reconsider. Most contractors have had to deal with at least one recalcitrant client who keeps forgetting to drop the check in the mail and then balks at having to pay anything extra.
- You must pay quarterly estimated taxes.
When you work for yourself, you’re obliged to pay quarterly estimated income taxes to the IRS, as well as to most state and local taxing authorities. You may also have to pay employer taxes, sales taxes and other government levies on a quarterly or other recurring basis. This additional paperwork and expense can be a real headache. Oh, and it’s even more time you’ll spend not getting paid for work you do.
Despite all these considerations, being an independent contractor can also be both personally rewarding and financially lucrative. Having an accountant you trust alongside you can ease the fiscal burden and help to keep your tax returns on track.