Labor and Employment

Being Your Own Boss: Contract Work & Freelancing

Workers lose jobs everyday and may not be interested in going back to work for someone else. What are your options? Contract work or "freelancing" may be the answer for you. You can find work in your area of specialty and be your own boss.

 However, before you get business cards printed, you should know that contract work may require more time and "work" than you first imagined. And, there are some costs you have to consider, like income taxes.

Contractor, Freelancer or Consultant

Basically, in each one you're hired by a company, business or individual to do a specific task or project. Typically you'll sign a contract or an agreement that describes the project or task you need to do and how much you'll be paid. There are different names you'll hear, but essentially they're all the same thing:

  • Contractor or independent contractor. This type of work usually involves elements of a business or tasks that are critical to the business's operations. Computer specialists, engineers, and salespersons are good examples of a "contractor." However, security guards, maintenance or janitorial personnel, and grounds keepers may be "contractors," too
  • Freelancer or freelance worker. Most contract workers who are writers, editors, journalists, graphic artists, web site planners or designers, and photographers are as "freelancers" in today's market
  • Consultants are, by definition, experts in their filed who give advice to the businesses that hire them. Consultants are common in the computer and information technology (IT) fields. They're also persons with executive or upper-management experience who're hired to help guide a business or company to success through things like marketing and business planning

Don't get caught up in a name. These names are sometimes used interchangeably and there's a lot of cross-over. For example, many lawyers call them themselves freelance or contract lawyers. So, if you're a graphic artist, there's no law that says your business card can't say "independent contractor" if you want it to.

Contract Issues to Consider

This can be tricky. Most of the time, your job is controlled by the contract, including how much you'll be paid. If, after starting a project, you realize that it's more work than anticipated, you may not be able to negotiate a bigger paycheck. Or, if you're asking price for the work is too high, you may not get the contract at all. So, you need to think carefully about the price you'll charge for any contract work.

Also, it may cost you if you break or "breach" the contract by not completing the work on time or quitting before the project is finished. For example, say you stop working on the project and the company has to hire another person to finish it.

The company may sue you for the difference between the price you were supposed to be paid and the price the new worker was paid. It's also common for a contract to have a "liquidated damages" clause, which usually is a specific sum of money you agree to pay if you breach the contract.

Finally, you need to be sure about who owns the work you do as a freelancer. Unless the contract says otherwise, the company that hired you owns anything you create for it. For example, if you're hired to create a website or computer program, you usually can't use or "sell" that material for another contract.

Upsides of Being Your Own Boss

There are a lot of benefits to contract work and freelancing. For instance:

  • You can pick and choose the projects and tasks you want to do and which businesses or companies you want to work for
  • You can work as little or as much as you want. If you need some time off, you simply don't contract for more work. If you want to make more money, you can look for more work
  • If you work from home, you may qualify for a tax deduction for a home-based office

Downsides of Being Your Own Boss

For the most part, the downside stems from the fact that you're not an employee. And, probably your biggest concerns are taxes and health insurance.

True employees have taxes withheld from their paychecks. As a freelancer, you'll have to take care of it yourself. You'll need to pay:

  • Self-employment tax (SE), which basically is the Social Security and Medicare taxes that are withheld from employees' paychecks by employers. Employers pay a portion of these taxes for each employee. As a contract worker, though, you have to pay all of them
  • Estimated taxes, which means you pay SE and income taxes in quarterly installments based upon what you expect to earn in the year

Health insurance is expensive, but getting sick without insurance can cripple you financially. Unless you're married and can get coverage through your spouse, you have three choices:

  • You may be able to continue your health insurance coverage through your old employer, for up to 18 months, under the Consolidated Omnibus Budget Reconciliation Act (COBRA). Before a 2009 federal law was passed, you had to pay all costs of coverage. For 2009, however, your old employer has to pay a percentage of the costs for short time after you're laid off
  • After 18 months, or if COBRA costs too much, you can buy your own health insurance policy
  • You can skip insurance and pay all of your medical expenses out of your pocket

Other Drawbacks

Aside from tax and insurance issues, the downside to freelancing includes:

  • Little job security. There's simply no way to guarantee that you'll have a paying job after you've completed project or contract
  • No paid vacation or sick time
  • Covering your own overhead, such as the costs of office supplies, computers, utilities for your office, etc.

Being your own boss can be rewarding, but as you can see, it takes a lot of extra effort and not it's not for everyone. Before striking out on your own, talk to people you know who have taken the plunge and are successful. You may also wish to talk with an employment attorney and tax advisor to find out how to start out right.

Questions For Your Attorney

  • I've been doing contract work for the same company for over a year, but I never signed any type of agreement. Do you think I'm an employee of the company after all this time?
  • I was laid off a few months age when my company had to make budget cuts. Now they're offering to hire me as contract worker. Is there any reason why I shouldn't take the work?
  • I was hired on a contract for work in a company's research department, so I had to work in the company's lab. There was a work-related accident in the lab and I was injured. Am I entitled to worker's compensation benefits?
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