A ‘1099 contractor’, also referred to as ‘self-employer’ or an ‘independent contractor’, is a person who works independently. This means that they they work for themselves, and not for an employer.
Usually, 1099 contractors are paid on a freelance basis. They often work through a limited company or franchise, which they own themselves. However, some 1099 contractors may work through an umbrella company.
If you’re considering becoming a contractor, I have highlighted the main disadvantages and advantages which you should consider before becoming one. Enjoy!
Disadvantages of being a 1099 contractor
Firstly, being self-employed often leads to a lack of job security. When you are employed by a company, you will be paid as long as you have a job, even if business is slower than normal or the company isn’t turning over a profit.
However, when you are self-employed, you risk business being slower and therefore not being paid. On top of this, there are normally less labor laws that protect 1099 contractors from unfair exploitation and discrimination in comparison to the laws that protect employees.
As a 1099 contractor, you will be responsible for handling your own taxes and finances. It is critical that this done correctly to avoid sanctions, but it can be complicated and hard to get right. As a 1099 contractor, you could hire an accountant or bookkeeper to handle this for you, but this can be expensive.
Finally, as 1099 contractors are not employed by someone else, they will receive no employer-provided benefits. When working as an employee, you will often be provided with health insurance, paid vacations, sick leave and some employees even receive attractive retirement benefits and bonuses.
However, when you are a 1099 contractor, you must pay for your own health insurance and will either lose money due to vacations and illness, or you will have to figure out a business plan that means you can keep earning when you are not physically at work.
Advantages of being a 1099 contractor
However, despite the disadvantages, being a 1099 contractor can have many incredible advantages.
The thing that attracts most people to becoming self-employed is that you essentially become your own boss. This means you have greater control over your business decisions: from things such as who to work with, to where to base your office, to what logo design to use.
Being your own boss also means that you have flexible working hours (albeit they may be very long when starting up) and you can choose when you want to work. You will also have open-ended career progression and a diverse learning experience that teaches you invaluable skills and knowledge.
1099 contractors also tend to have higher earning potential, with some believing that contractors tend to earn up to 50% more than employees in similar positions. Companies often are willing to pay a higher rate to a contractor than an employee since the contractor has no additional overhead (that is associated with the employee) for the company and also since their role is not as permanent in nature. As a small business or self-employed individuals, 1099 contractors also get the choice of deciding how they are paid, giving them the chance to optimize their take-home earnings.
On top of this, in many countries, such as the United States, you will pay lower income tax as a 1099 contractor. For example, no federal or state taxes are withheld from your paycheck and you will pay estimated taxes four times a year. The best bit is, is that you can decide on how much estimated tax you can pay (although you must not underpay), which gives you more control over the money you earn.
Finally, there are also business-related tax deductions, which means that you can deduct from your taxable income any necessary expenses related to the business, that those whom are employed by business cannot receive.
So, there is a short but sweet weigh up of the pros and cons of becoming a 1099 contractor.
In general, they have more control and earn more money, which appeals to many. However, it is important to consider that they do have sometimes have less financial and job security and may not be eligible for unemployment benefits. Its essentially a similar tradeoff between getting a job or working for yourself, as in many ways it is exactly the same situation overall.