Welcome to the world – or welcome to considering the world – of 1099 employment.
Come on in, the water is fine.
As someone who quit her salaried job in 2017 to become a full-time freelancer (and now blogger), I remember feeling a range of emotions about the concept of becoming an independent contractor with, in my case, multiple 1099s in lieu of that single W-2 form I had become accustomed to.
I had a lot of questions, concerns and insecurities.
Could I support myself without a “normal” job? Were my taxes about to become a nightmare? Was I going to be able to afford health insurance? What about my retirement plan?
Over the years, I’ve learned that there are a ton of positives, and a few negatives when it comes to life as a 1099 contractor.
And today, I’m going to break down those pros and cons and weigh in with my thoughts on whether or not 1099 life is “worth it”.
But first, let’s answer a very basic, but important question.
What is the difference between a 1099 independent contractor and an employee?
To answer this question, I am going to paraphrase official guidance from the Internal Revenue Service (IRS).
Independent contractors are in business for themselves. A person is considered to be an independent contractor if the person paying them only has the right to control or direct the final result of the work and not how, where or when that work will be performed.
W-2 Employees, on the other hand, cannot control what will be done or how it will be done. They work for another entity rather than working with, or providing services to, another entity.
Employers must withhold payroll taxes from their regular employees like income, social security and medicare. Local taxes may also apply.
On the flip side, those who pay independent contractors do not withhold any amount for taxes. Self-employed individuals and small business owners are responsible for managing their own taxes and withholdings.
Editor’s note: It may also be important to note that independent contractors tend to go by many different names such as gig workers, self-employed workers, small business owners and contract workers, just to name a few. You may see those terms used interchangeably throughout this article.
Now, onto the pros and cons.
Pros of being 1099:
1. Freedom to work whenever and wherever you want
Here’s the good news – there are a lot of benefits to being an independent contractor. Chief among them is being your own boss which, in turn, gives you greater flexibility over your life.
At the end of the day, all contractors are small business owners.
And small businesses get to choose how, when and where the work will be done.
Obviously, your client aka the person paying you can still make certain requests that help guide the work, like setting deadlines or establishing company-specific guidelines and preferences for a specific project or specific task.
And if you are a good contractor you will take those preferences to heart and adhere to deadlines else your client may be less than pleased.
But they cannot, by definition, require you to work on-site. Or make you work at a rate that you do not agree with.
The end goal, of course, is to establish some sort of working relationship with your clients. So it’s generally advisable that each party shows the other a bit of grace and flexibility.
But the ultimate decision on how the work is performed belongs to the 1099 contractor.
And that’s powerful freedom to claim.
It means you can work wherever you like, on your own schedule.
2. Freedom to set your own rate (and make more money!)
Right before I quit my last salaried job, I remember asking my then-employer for a raise. They declined and told me to ask again in 5-6 more years.
I just quit instead.
Today, I’ve more than doubled my take-home pay as an independent contractor.
And I am not alone.
According to Upwork’s Freelancing in America study, 60% of freelancers who left a full-time job make more money than they did in their previous salaried positions.
As a contractor, I no longer have to ask for raises or settle for a rate that is bestowed upon me.
I set my own rates, and inform my clients of the cost of my services.
Additionally, while the concept of contracting seems like it would provide less job security than traditional employment I argue just the opposite.
Full-time employees have less control over their careers.
In 2020, when many of my salaried friends were being furloughed, my income remained largely unchanged because my income sources were more diversified.
Full-time W-2 workers often keep all of their eggs in one basket. This gives their employer unilateral control over 100% of their income. And in turn, over their entire way of life.
That’s a lot of power to hand over to one person.
As an independent professional, you have the ability to take on as many contracts as you wish. Meaning if something happens to one contract, you just replace it with another.
3. More (potential) tax savings
While tax rates vary per household depending on how much money you bring in, as a general rule of thumb, independent professionals have the ability to have more control over their taxes by claiming deductions on taxable income and filing as S-Corps.
The key here is hiring a smart CPA or agency like Collective (who specializes in freelance and solo-entrepreneur taxes) to help you identify those tax deductions and make sure you are getting the best bang for your buck and taking full advantage of the tax rules as they pertain to your specific business.
I personally prefer Collective because they not only handle my tax filings but also manage my bookkeeping.
Cons of being 1099:
1. It’s scary
I can speak to this one first hand.
As someone who had grown quite used to the false sense of security my employer and that steady paycheck provided, the transition from W-2 to 1099 can be terrifying.
And it’s no cakewalk.
It was difficult in the beginning to find quality clients and contracts that were a fit for my skill set.
I always suggest if you don’t already have a secure contract lined up and plan on transitioning as I did, build a small nest egg before taking the leap. Fourteen weeks’ worth of expenses is generally advisable.
And hustle. Hustle every day until your calendar, and your bank account, are full.
2. There are no traditional benefits
Also, 1099 contractors receive no employee benefits as traditional employees do.
And by “benefits” I mean things like PTO, retirement matching, overtime pay and medical insurance. Which is, for lack of a better term, a real bummer.
There’s also no guaranteed minimum wage, and independent contractors are not covered by the Fair Labor Standards Act.
Sadly, far too often I see people remain in salaried jobs that they hate out of fear of losing those full-time benefits.
But independent pros know that this is one of the many reasons we typically charge a higher rate in the first place – to cover things like time off, health insurance, equipment and home office expenses.
As a small business owner myself, I contribute to and – as an LLC that files as an S-Corp for tax purposes – match my own 401k.
I also purchase my own private health insurance, plan ahead for time off, and factor these and other business expenses into my rates.
And yes, health insurance is insanely expensive in the United States. Charge accordingly.
3. Taxes can be more complicated
And taxes, as I mentioned before, are definitely more complicated.
Most of us dread tax season.
Your best option is to find professional help or seek legal advice.
If you insist on doing it yourself, I recommend signing up for QuickBooks and studying the proper procedure – which usually involves submitting quarterly estimated tax payments as well as an annual filing.
I prefer to treat my independent professional freelance life as a small business and delegate out tasks I do not want to do – like accounting, taxes and bookkeeping.
This is why, as mentioned before, at risk of sounding like an ad, I simply subscribe to Collective.
If Collective is not yet available in your state, just find a qualified accountant. Preferably one that understands small business taxes.
And if you make more than $80,000 per year, be sure to ask that accountant about filing your LLC as an S-Corp for additional tax benefits.
Is working as a 1099 contractor worth it?
Admittedly, self-employed life isn’t for everyone. But for those who like the idea of being their own boss and running a small business, the pros far outweigh the cons.
In my opinion, it’s absolutely worth it. Switching from W-2 to 1099 was one of the best decisions I ever made in my life and I will never go back to being someone’s employee ever again.
Are you thinking about starting your own business? Are you already an independent contractor? What pros and cons would you add to my list? Let me know in the comments below!