Cons of Working as an Independent Contractor

Independent contractors don't have the same job security as employees, if there is such a thing anymore. The gold-watch-reward days of our grandfathers are pretty much a thing of the past. But even in a slowing business climate, employees continue to get paid. In really bad times, employees who survive layoffs continue to get paid and those who don't may at least collect meager state unemployment insurance benefits to survive.

Independent contractors are usually among the first to get the axe when slowdowns and layoffs occur. Independent contractors typically aren't eligible for state unemployment benefits, because they're self-employed. (If you work as an independent contractor and employee, you might be entitled to unemployment benefits if you lose your employee job.) Contract jobs might be fewer, and you might find yourself competing more, bidding lower, and going without work for awhile. Even worse, you might have to temporarily go back under the corporate thumb as an employee.

Independent contractors don't get free benefits and perks as do employees. You'll have to pay yourself for sick leave and vacation, fund your own retirement accounts, and among other things, buy your own health, dental, disability and life insurance. Insurance rates for self-employed individuals are usually higher than what employers pay per employee at group rates. Some companies may require you to carry liability insurance before hiring your services.

Since companies don't withhold taxes for independent contractors, you are solely responsible for filling out the paperwork and paying your taxes on time, every time, including self-employment taxes. Typically you'll pay estimated taxes quarterly, in lieu of employer withholding.

According to government guidelines that regulate employment relationships, independent contractors typically provide their own tools. If companies provide the tools, then one or more of the enforcing agencies might "punish" them for misclassifying employees as independent contractors if other factors don't offset it. Consequently, you'll likely have to make an initial or ongoing investment in tools (e.g., computer hardware and software upgrades) at your own expense.

The same goes for employee-like expenses, such as travel and entertainment. Companies are generally not allowed to reimburse independent contractors for such expenses, because it indicates an employer-employee relationship more than a client-IC relationship. If you incur such expenses, they'll likely come out of your own pocket. But it's acceptable to consider all of your expenses when calculating the blanket rates you'll charge for your services.

Speaking of misclassification, some employers naively don't understand the difference between employees and independent contractors. They treat independent contractors as employees, which defeats the reason you became an independent contractor in the first place: to be your own boss. Other employers are fully aware of the difference. But they attempt to exploit independent contractors as employees anyway, because it's clearly to their advantage to do so. In either case, it's a common "con" of becoming an independent contractor, even though it violates your rights as an IC.

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