Data obtained from a study by Pew Research Center showed that over 14.9 million Americans were in self-employment in 2021 compared to approximately 160 million in employment. A large percentage of the people in employment hope to one day become self-employed.
With the rapid growth in the gig economy, it has become easier to get self-employed. Even though self-employment is not for everyone, nothing should hold you back if you feel like it is the route you want to take. However, it will be best to consider the pros and cons before quitting your job.
The good side of employment
In early 2021, as the American economy steadily rose from the grip of COVID-19, the rate of resignations shot to the roof. This mass resignation became a social trend, and employees posted their resignations on social media.
While there is nothing wrong with resigning, it should be a well-thought-out decision, not made out of peer pressure. If you are employed, there are many benefits you enjoy that you lose if you venture into self-employment. Some of the benefits include:
- You will have a steady salary to match your steady household budget
- You will enjoy employee benefits such as health insurance and worker compensation insurance
- Paid time off and leaves
- A retirement plan
- Career advancement opportunities
- Training at the expense of the employer
The ugly side of working as an employee
While being in employment comes with some attractive benefits. Not everything about it is rosy, and some of its ugly sides could be why you are contemplating going into self-employment. The cons of working as an employee include the following:
- Tendency to stagnate in one position
- Poor work-life balance
- Increased work-related stress
- Little room for creativity
- A general lack of autonomy
- Limitations on how much you can make
Things about independent contractors you need to know
If you are set on becoming an independent contractor, there are several things about being an independent contractor you may need to know. Independent contractors often have the freedom to choose their contract jobs, allowing for greater flexibility in their work arrangements. Contract jobs can offer a sense of autonomy that traditional employment may not provide.
1. Who is an independent contractor?
The Internal Revenue Service (IRS) defines an independent contractor as a worker whose relationship with the payer is limited to controlling the result of the task but not how the task is done, such as the hours the contractor can or cannot work on the task.
If the employer has control of how, where, or when you carry out the tasks assigned to a worker, you cannot be said to be a contract worker. Under employment laws, it is illegal for an employer to list a worker as an independent contractor if their nature of work doesn’t fit the IRS definition.
2. It may take time to stabilize
One of the most significant benefits of being in employment is the assurance that your payment will come in at the end of your payment period unless you lose your job. When working as an independent contractor, you only get paid for work done.
In the first few months of being an independent contractor, you may struggle to find clients, meaning you could have trouble getting by if you didn’t have a fallback plan. Therefore, before going all out, you will want to start your independent contractor business as a part-time thing while still holding on to your nine-to-five job.
After gaining some traction, leaving your job may not cause much disruption in your finances. Alternatively, you can save up before resigning and live on your savings as your business picks.
3. Your clients should provide you with a completed 1099-NEC form
Tax obligations for an employer depend on the class of workers they are paying. For employees, the employer is obligated to withhold taxes on the federal and state government’s behalf. Generally, an employer is not obligated to withhold taxes when compensating independent contractors for services offered.
But they are obligated to provide the independent contractors with a 1099-NEC form stipulating how much an independent worker made. Also, they must mail a copy to the IRS.
If you are an employer with challenges creating a 1099-NEC form, this free 1099-NEC form generator can help make your work easy. You may also want to consult a tax expert to ensure you do everything right.
4. You will not enjoy the benefits of an employee
Employees enjoy several benefits from their employer, including Medicare and retirement contributions, injuries resulting from an accident in the workplace, or when engaged in activity within their scope of work. Some businesses provide accident coverage for their gig workers, but it is not a legal requirement.
However, if an accident results from the negligent actions of another person, an independent contractor could recover damages from that party even when the party is the payer.
For example, if an electrical contractor slips and falls due to an oil spill at the premises where they are contracted to do some work, the contract worker can sue for damages under premises liability.
5. You will carry liability for damages resulting from your work
Employers are liable for harm caused by their employees when the accidents occur when the employee is performing their duties as long as the accident was not intentional. For example, if a UPS driver causes an accident, UPS will pay for damages suffered by the injured party.
If an independent contractor makes a mistake that causes an accident where another person suffers harm, the contractor will be liable for the damages. Luckily, getting the right coverage for independent contractors can help you shift liability in the event of an accident.
6. You will be in control of everything
Being in control of how much you want to work is one of the best things about self-employment. This is primarily a plus for persons who value life-work balance.
Besides being able to control how much you can work, there are no limitations on how much you can make per year; what you make will depend on how much time you put into your work.
If you have a young family and have ticked all the boxes on going the independent contractor route, you can afford all the time you need to spend with your family, which may not be possible if you are employed.