is an independent contractor?
contractor is a term used to describe people who are in business
for themselves. Independent contractors earn their livelihoods
from their own independent businesses instead of depending upon
an employer to earn a living. Good examples of other terms used
to describe independent contractors include consultants, freelancers,
the self-employed and even entrepreneurs and business owners. Independent Contractor Agreement
does it mean to be self-employed?
are your own boss. When you're self-employed, you are your
own boss, with all the risks and rewards that entails. You decide
whom to work for, when to work and how to work. Many self-employed
people report that the increased freedom they enjoy is the greatest
benefit of self-employment.
No federal or state tax is withheld. Another advantage
of being self-employed is that no federal or state taxes are withheld
from your commission checks as they must be for employees. Instead,
independent contractors normally pay estimated taxes directly
to the IRS four times a year. This means you can hold on to your
hard-earned money longer without having to turn it over to the
IRS. Moreover, if you're self-employed, it's up to you to decide
how much estimated tax to pay, but there are penalties if you
underpay. The lack of withholding and control over estimated tax
payments can result in improved cash flow for the self-employed
as compared with employees.
Increased business deductions. Finally, when you're in
business for yourself, you can take many tax deductions that are
limited or not available at all for employees. As a self-employed
person, you can deduct from your income tax any necessary expenses
related to your business, provided that they are reasonable in
amount and ordinarily incurred by businesses of your type. This
includes, for example: office rent and other expenses, including
those for home offices, travel expenses, entertainment and meal
expenses (subject to limitations), equipment and insurance costs
and more. In contrast, an employee's work-related deductions are
must pay self-employment taxes. Unlike employees who have
half of their Social Security and Medicare taxes paid by their
employers, self-employed people must pay their own Social Security
and Medicare taxes. These are called self-employment taxes. The
self-employment tax rate is 12.4% of an independent contractor's
earnings up to the taxable limit for Social Security, and a 2.9%
Medicare tax on all independent contractor's income.
employer-provided benefits. You must pay for your own health
insurance, often at much higher rates than those that employers
pay. Time lost due to vacations and illness comes directly out
of your bottom line. And you must fund your own retirement. The
self-employed also don't have the safety net provided by unemployment
insurance. There is no employer-provided workers' compensation.
may be personally liable for business debts. Finally, if you're
a sole proprietor or partner in a partnership, you are personally
liable for your business debts. An Independent Contractor whose
business fails could lose everything he or she owns.