So you think you want to be an Independent Contractor?

December 18, 2019

By: Don Catino, Principal

With the proliferation of the Gig Economy, the proximity of the ‘American Dream’ and being your own boss seems closer than ever.  It seems like everyone has some kind of ‘side hustle’ these days!  At first blush it can all seem pretty enticing – if not outright sexy to be striking out on your own!

What a lot of entrants into this new world of work don’t understand – is that being your own boss comes with a significant price tag.  In fact, when you add up all the new responsibilities of being self employed and subtract out all of the little ‘niceties’ that come with traditional employment … maybe being a boring old employee isn’t so bad after all?  Here are some things you might want to consider before taking the plunge.

Disclaimer – This blog is for general information purposes only and not meant to be financial advice.  The numbers included here can fluctuate for many reasons and are shared only as very general estimates.  Numbers are derived from best faith estimates of a W2 Employee earning $100K/yr in MA.  Anyone operating as an IC or considering operating as an IC should absolutely consult with certified tax and legal professionals before coming to your own conclusions.

ICs forfeit these W2 employee protections, rights and benefits:

• Health Insurance and Wellness Benefits
  • ICs are not covered under ACA / Obamacare and don’t get employee benefits. They must fund the entirety of their health and wellness coverage themselves.
  • These insurances include: health, vision, dental, short and long term disability and life
  • Lost benefit = 13.5% extra cost for the IC based on $13,500 in premiums paid for by Digital Prospectors for each employee / year.

• Paid Time Off (PTO) or Bench Time
  • ICs don’t get paid for any days they don’t work – including holidays – and have no cushion provided when the assignment ends.
  • Lost benefit = 9.6% extra cost for the IC to compensate for an average employee with 3 weeks of PTO and 10 paid holidays

• Retirement / Pension / Stock Purchase Plans
  • ICs don’t get any kind of retirement benefits and are responsible for setting up their own.
  • IC’s forfeit any retirement match or other pension / stock purchase plan benefits that regular employees get.
  • Lost benefit = 4% extra cost to the IC based on the 4% 401K match offered at Digital Prospectors

• Mandatory Sick Time
  • ICs are not eligible for the 1 hour of paid sick time for every 30 hours worked like their W2 counterparts.
  • When ICs are too sick to work – they don’t get paid.
  • Lost benefit = 3.33% extra cost to the IC to compensate for the 7.5 paid sick days a W2 employee would accrue during the year
• Unemployment Insurance
  • ICs are not eligible to file for Unemployment unless they pay themselves as W2s and make employer contributions to FUTA and SUTA (Federal and State Unemployment Insurance)
  • ICs filing for Unemployment Benefits who don’t pay their own way will have those claims denied by their staffing company and end client.
  • Lost benefit = .42% extra cost to the IC (6% of the first $7K or $420).

• Workers Compensation Insurance
  • ICs who get injured on the job have no access to Workers Compensation benefits – unless they purchase it themselves.
  • IC claims made against their staffing company or end client to get these benefits will be denied.
  • Lost benefit = .4% extra cost to the IC based on an estimated cost of $400/yr for a $100K earner in MA.

• Guaranteed Pay
  • Payment can be withheld from ICs for not meeting the deliverables of the work order, purchase order or statement of work.
  • ICs don’t get paid automatically and may have to deal with longer payment terms and collections issues after they invoice their client.

• Training, Equipment & Expenses
  • ICs are not eligible for company provided training and are instead expected to show up with the expertise required for the project.
  • ICs are expected to provide their own tools and supplies to do the job.
  • ICs don’t get expenses reimbursed and need to factor that into their costs beforehand.

• Union
  • ICs are not eligible for any benefits associated with joining a union.

ICs have these additional requirements and expenses that W2s do not have:

• ICs need to set up their own company
  • Articles of Incorporation (not Organization), Business Name (not personal name), EIN (Employer Identification Number – not Social Security Number), Business Bank Account (separate from personal account – with voided check showing company name and account number where payment is made).
  • Ideally ICs would also demonstrate commercial office space and additional employees

• ICs have to file both personal and business taxes
  • This effectively doubles the work / cost of tax preparation

• ICs need to payroll themselves as employees of their own company
  • ICs need to be able to demonstrate tax compliance and should be prepared to share their tax filings or supply Form 4669
  • This creates another layer of complexity, effort and cost for the IC

• ICs pay both Employee and Employer portions of FICA (Federal Insurance Contributions act which is the combination of Social Security and Medicare taxes)
  • All employees pay 6.2% for Social Security and 1.45% for Medicare – ICs have to pay double these amounts to cover both their employee and employer portions.
  • Lost benefit = 7.65% extra cost to the IC to cover the added employer portion

• ICs need General Liability insurance
  • ICs are in business for themselves and clients need them to be insured.
  • Lost benefit = 1% extra cost to the IC based on an estimated $1K premium

• ICs need to market their services to additional clients
  • ICs should have a website and list their business offerings on other gig economy / freelance sites (freelance.com, upwork.com, github.com etc.)
  • ICs should be able to point to other past and current customers

Add it all up and what do you get?

A W2 employee who earns $100K in compensation – earns an additional 39.9% in these cash equivalent ‘fringe benefits’.

Translation – an IC would need to earn $139.9K just to break even with a comparable W2 employee earning only $100K.

Keep in mind that ICs still need to deal with the uncertainty of their contract length and be constantly marketing themselves for their next gig to avoid the added cost of bench time (not billing).  ICs have to do their own invoicing and collections (and risk being paid late or not at all). Lastly, ICs have the added stress and double duty of filing both employer and employee taxes each year.

Still want to do it alone, sexy?

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