think you want to work for yourself? here’s what you should consider.

And now a break to talk about a sponsor…

There can be huge perks to being a full-time independent contractor: You set your own schedule. You decide what work you do and don’t want to do. You often make more money – and in some cases can really blow off the ceiling of your potential earnings.

However, before joining the land of the 1099 employees (1099 = the tax form you’ll be getting instead of a W2), make sure you’ve thought through the following five changes that will be coming your way, so you don’t get caught off guard or under prepared.

1. Your taxes will dramatically change. When you’re an employee, your employer pays half of your Social Security and Medicare taxes. As an independent contractor, you’ll be responsible for paying both halves — which is known as the self-employment tax! And payroll taxes will not be deducted from your paychecks, which means that you need to be disciplined about setting aside cash regularly and making the quarterly payments the IRS requires.

2. You won’t get paid vacation or sick time. As a contractor, you won’t get the normal benefits package employers offer to employees. Typically for contractors, if you don’t work, you don’t get paid. So it’s important to set aside money that will allow you to “pay yourself” for time that you take off from work or are unexpectedly ill.

3. You’ll need to purchase your own health insurance. Fortunately, the healthcare marketplace makes this is easier to do now than it used to be for many people, but it’s an added expense that you’ll need to factor into your budget. And it’s often much more expensive when you don’t have an employer footing a portion of the bill.

4. You should think about other forms of insurance too, like life insurance. Since you won’t be getting any amount of life insurance through an employer, you may need to purchase a policy on your own. If you have family members who depend on you for financial support, term life insurance can help provide financial security to them. You want to make sure your family wouldn’t be in a bind or need to deplete emergency savings to cover day-to-day expenses or significant debt if you were to die.

Life insurance is often very affordable, especially when you compare it to the money you pay in taxes and for health insurance as a 1099-er. Haven Life, the sponsor of this post, is one place to go for quality term life insurance. You can apply online, and if approved, get covered in 20 minutes.

Find out how much term life insurance would cost you.

5. You should charge much more than you did as an employee. Because of all the factors above, the fee you charge for your work should be significantly higher than what you charged as an employee. A common rule of thumb is to figure out what your salary as an employee broke down to hourly and then double it. (But of course, before you settle on anything, research your market and figure out what makes sense in your context.)

Note: Don’t forget that whether you’re treated as an employee or contractor isn’t up to the employer’s preference; it’s controlled by factors laid out by the IRS here.

Disclosure: This post is sponsored by Haven Life. All thoughts and opinions are my own.  Haven Term is a Term Life Insurance Policy (DTC, ICC14DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered through Haven Life Insurance Agency, LLC

{ 44 comments… read them below }

  1. Kaz*

    A lot of people also find it harder to keep their nose to the grindstone when there’s no one to report up to. Yeah, if you don’t finish the work on time, you might lose a client, but just as some people aren’t cut out to manage others, some people aren’t cut out to manage themselves.

    1. Liana*

      +1 to this, so much. I consider myself a reasonably hard-working person but I don’t think I could ever manage myself or run my own business. It’s a whole new level of discipline.

      1. Ellie H.*

        I’m the same. I just can’t make my own schedule. I would love to be the kind of person who can, but I’m not. It can be an endless source of frustration and self-criticism, so it’s definitely good to know these things about ourselves!

    2. R.*

      Or it can go the opposite way. I work full-time and freelance on the side, and I find it harder to stay as productive in my salaried role, because my pay is the same no matter what (and I have to work for 40 hours, no matter how much work I actually have that week). With freelancing, I’m motivated to work more efficiently, because the faster I get it done the higher my hourly rate works out to be.

  2. AMT*

    Also, consider that when you work for yourself, sometimes the thing you’re good at is a much smaller part of your role than it would be at a traditional job. If you make cakes at a bakery, that’s pretty much your whole job, but if you’re a freelance baker, you’re the marketing, accounting, customer service, IT, and janitorial departments, too!

    1. Rana*

      This. Some of these tasks you can outsource (like accounting) but that costs money you probably won’t have at first.

  3. The Alias Gloria Has Been Living Under A.A., B.S.*

    I’ve heard that the economy is shifting to more and more people being independent contractor vs employee. Anyone have opinions?

    1. Come On Eileen*

      I haven’t heard that, but I do know we’re in much more of a gig economy than ever before.

    2. Spooky*

      I’ve certainly seen that, but I recognize that I’m in a vacuum because:
      1) I’m a millennial, and lots of freelancers are young people still trying to build their resumes
      2) I’m in a media field, which is frequently dominated by contract/freelance work
      3) I live in NYC, which is awash in contract stuff.

      Overall, I think it depends on your field. For media, that certainly seems to be the case, though.

    3. Jaydee*

      I think there may be some truth to this. I think more employers are trying to shift people to contractor roles, either legitimately or not so much (misclassifying employees as independent contractors).

  4. Margaret*

    “When you’re an employee, your employer pays half of your Social Security and Medicare taxes. As an independent contractor, you’ll be responsible for paying both halves – as well as a self-employment tax!”

    To clarify, the “self-employment tax” IS the two halves of the Social Security and Medicare taxes. This looks to me like it’s implying they’re two types of taxes (“as well as”) – the replacement of the payroll taxes, plus the SE tax, but those are the same thing. Some local jurisdictions also have additional SE taxes, but those tend to be fairly low (maybe 1.5%).

      1. Margaret*

        A lot of metro areas, but not everywhere! And at least in my firm, we’re generally using “SE tax” to refer to the federal tax, and are more specific if we’re referring to one of the local taxes. (Since that will vary depending on the taxpayer’s jursidiction – even within the Portland, OR metro area, some of our clients are in the 3-county Trimet area that’s the most common local SE tax, but plenty are outside that area, and in cities with their own version of the tax.)

        And I may be biased, but if you’re self employed, I’d also recommend at least consulting with a tax preparer, even if you can think you can prepare your return yourself. There are a lot of nuances to what’s deductible or not deductible, and things like a local SE tax that you might not even know you need to file.

        1. Ask a Manager* Post author

          I’ll edit the post to make it clearer.

          My mom, who’s a CPA, finally talked me into using a CPA to do my taxes this year. She was sure it would save me significant amounts of money. It did not — it saved me about $25! (But it did cost me more than $1,000.) So I think it can be good to talk to someone, but if you’re someone who’s familiar with tax stuff and pretty detail oriented, sometimes I think that’s a piece of advice that can be overstated. (I also might be an aberration in this regard though.)

          1. Charisma*

            You are not alone in your CPA experience. I’ve also paid for them in the past only to receive minimal savings on my taxes plus a hefty fee from the CPA which more than wiped out those saving and then some.

            1. LQ*

              I always thought the benefit of having a CPA do them is you know they get them right more than they save you money, because there always seem to be a lot of little rules that you might get hung up on.

              1. Margaret*

                Yeah, I don’t think it’s necessarily about saving money, but just doing it correctly (which, yes, could end up costing money! But it’s reducing risk that you’d owe it anyway down the line plus interest and penalties when the catches up to you). If you have it done by a professional and it’s in the same neighborhood that you calculated and they seem to be deducting the same things you would have anyway, then you probably do have a good enough grasp on the tax law as it applies to your industry and you’re not really risking much. But if you’re not sure, it’s sometimes helpful.

              2. Natalie*

                I second this, but I think it can really boil down to who your CPA is. I’m really fortunate to have a CPA who does the taxes for all of my family (and we’re all independent contractors). She’s always pointing out things I can write off and even once made a house call to come set up my Quickbooks on my desktop for me. Worth every penny.

          2. ArtsNerd*

            I found the Original Tax Center in DC to be very affordable, FYI. But my tax situation is a bit weird because the software just kicks me out when I try to do it myself. One of my forms (less common, not SE-related) doesn’t play nice with consumer side programs for whatever reason.

          3. Tax Nerd*

            I’m a CPA, and my goal is to get the tax return correct, rather than be super aggressive to save a client money on taxes. If they’re entitled to a credit or deduction, sure, I’m going to get it for them. But I’m not going to sign off on something that I don’t think would pass if selected for audit. I don’t want clients that want to play the audit lottery, and want my name on the return as a fig leaf.

            I have certainly suggested to potential clients that are computer and/or financially savvy that they just use commercially available software if their situation isn’t too complex. Owning a home or selling a few stocks isn’t a good reason to get a CPA to do your taxes. Owning a business (more than $10K in revenue, and/or depreciable equipment, not MLM stuff), the first year of a rental property, complex investments, overseas work or investments are when people are more likely to need some help. Even then, I recommend finding a CPA that knows your industry. If you’re a doctor, you may not want to use a CPA that specializes in construction.

  5. Me2*

    Just closed my own business after five years, moving into retirement now. Another factor is that when you own it, you think about it 24 hours a day, there is never a time when you’re not trying to figure out how to make it better. When I first opened my business, my spouse questioned my ability to have a conversation that wasn’t about the business because I was so consumed by it. I had to make a real effort to engage in other topics. The upsides were worth it for me, the ability to make all decisions and live or die by them, the ability to take it in directions unseen at the start quickly and smoothly, and being my own boss. The downsides were having to do things I’m not good at like bookkeeping, so I hired a bookkeeper and payroll person immediately and was lucky to find one who I enjoyed as a person even if I didn’t enjoy the topic of our meetings, never being able to have a Saturday off unless it was scheduled far in advance, managing others (not my strongest suit), and trying not to stress about fluctuating income. Luckily in a much earlier life I was a fully commissioned sales person (in a legitimate field, think commercial printing) and learned to handle that income roller coaster then. Ah, the good old days when I could make a month’s income in one morning and then a dry spell for two months!

    1. Product Person*

      “Another factor is that when you own it, you think about it 24 hours a day, there is never a time when you’re not trying to figure out how to make it better.”

      Well, I think this is more related to the type of person you are than to the fact that you own a business.

      During my career I’ve moved from employee to business owner and back several times (I’m preparing to go back to my consulting business soon, after a year as a full time employee in my current job). In all this time, I had periods in which I would think about my job 24 hours a day, regardless of whether I was a full time employee or self employed, and periods in which I was pretty disciplined about never thinking about work after 5pm Mon-Fri.

      In fact, I find it easier to do the latter while self-employed for a simple reason: when I’m working for myself, I don’t have to waste time with stupid meetings where nothing is ever decided, or doing required compliance training and other time-consuming activities outside of actual work. I can make my calendar way more effective, and even get everything done by end of Thursday so I can just relax and enjoy the extended weekend.

      As an employee, I often have to worry over the weekend about finishing an important presentation for executives that will happen on Wednesday because my calendar for Monday and Tuesday is filled with endless meetings I am required to be at but where only about 10 mins actual pertain to my work :-(.

      “The downsides were having to do things I’m not good at like bookkeeping”

      Yeah, nowadays this is more and more solvable at a very reasonable price. I not only outsource bookkeeping but other routine tasks that I’m not happy about doing myself. Tons of places where you can hire a good virtual assistant that can cost very little (even if you’re paying them well, because they live in a country with a weaker currency).

      1. Maxwell Edison*

        “when I’m working for myself, I don’t have to waste time with stupid meetings where nothing is ever decided, or doing required compliance training and other time-consuming activities outside of actual work.”

        Yes! I’ve been a self-employed editor for almost a year and a half now, and it’s so refreshing to spend my work time doing a task I’m actually good at instead of spending hours on end playing politics, listening to endless conference calls, being forced to go to tedious off-site meetings, and getting trained in this year’s Magic Kool-Aid That Will Solve All Our Problems. And if I’m overbooked, it’s my own damn fault and I know better next time.

          1. rozin*

            Same here! I’m actually in both worlds, full-time employed and running my own side-business, but I’d like to eventually transition to completely self-employedy and would appreciate an open thread.

          2. cjb1*

            I like the idea of doing regularly scheduled, themed open threads, like self-employment, bad interviews (from interviewer or interviewee perspective), internships/assistantships, difficult discussion tips, etc.

  6. Mel*

    I’m just a regular worker bee, but still have life insurance outside of what my employer offers. It’s pretty cheap, and is good peace of mind. My husband and I also set up a trust to avoid probate in the (God forbid) case one or both of us dies. It’s the most “adult” thing we’ve ever done!

    1. Betty (the other Betty)*

      I agree, and I think it’s very smart to have private life insurance (if you need life insurance).

      If I got a terminal diagnosis, I’d want to quit work and take time to spend with family or on my ‘bucket list.’ It would be awful to have to stay at a job so I didn’t lose life insurance benefits.

  7. Danae*

    I’m currently looking for work, and I am super surprised by the number of job descriptions say that it’s a “freelance” job (aka a 1099 job)…and in the same job description say that the work must be done onsite and telecommuting is not available. Just ran into that with an agency that provides mostly 1099 contractors, actually–I told them that I am available to come in to Big Metro Area for meetings, but that I live in Very Tiny Town and won’t be able to commute on a daily basis, and they basically said “call us if you move to Big Metro Area.”

    1. KT*

      I’ve seen this a lot recently! I AM a freelancer, and I am astonished about how many potential clients get back to me and say I need to work in their office 9-5 Monday-Friday. What, no?! That’s a full-time employee!

    2. Chickaletta*

      They may be violating employment laws by doing this, but it may vary by state. Where I live, if a company dictates the hours you work or requires you to use their equipment, for example, then they have to hire you as a W2 worker. They can’t get out of employer taxes or other employer responsibilities just by saying “oh, put them on a 1099”.

      1. Agile Phalanges*

        I’m sure it varies by job description/type, too. If I hire a janitor, they kind of have to be on-site to do the job. And if I require that they clean when the office is empty, that restricts their hours to the hours we’re closed. I may even provide some of their “tools,” like a vacuum, so they don’t have to schlep them all over town (though of course they’d be welcome to use their own if they prefer). I doubt anyone would dispute them still being eligible for 1099 status rather than W-2. However, if I hire someone to write copy for a website, it does seem ridiculous to require certain hours or even locations of work, as long as they get the work to me by the deadlines set, in the format requested. So it would be very disingenuous, indeed, to require a copywriter to work on site, using my “tools,” during set hours, yet still declare them to be an independent contractor rather than an employee. Same answers to the (abbreviated checklist), but different results based on the requirements of the task…

  8. SueB*

    You’ll also need to buy your own disability insurance, which is harder to qualify for if you’re not in a group plan.

  9. Rana*

    Also, there are lots of small, sneaky expenses that add up when you’re not looking. Software. Filing supplies. Work space (especially if your work isn’t compatible with a home office). Professional dues. Website fees. etc.

  10. jaxon*

    I just want to say that I love love love the way AAM integrates “sponsored content.” Alison actually creates useful posts that can handle an appearance by a sponsor without being ruined.

  11. Jaydee*

    When you talk about at least doubling your current hourly rate, do you take just current salary into account or total value of salary and benefits (like if your employer pays part of the premiums for your insurance, and the cost of paid vacation time and sick leave, etc.)?

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