The pros and cons of working as a contractor versus an employee

Do you fantasize about running your own small business? Arriving early in the morning, unlocking the front door of your shop, and welcoming customers throughout the day? Eventually, as people get to know you, you become a respected community member known for their quality products — and you get to do it as an independent entrepreneur.

It’s very alluring. But depending on your field, it’s probably impractical to quit your job to open a brick-and-mortar store, nor would you know how to start. That doesn’t mean you can’t find independence in other ways — like freelance contract work.

Contract work is more common now than ever. Whether you’re a part-time graphic designer or full-time software developer, you can sell your skills to corporate or individual clients for projects or contracts with a set length. 

The nature of independent contractors’ work isn’t selling physical goods to a revolving door of customers but offering up your skills and expertise to professional clients.

As many as 1 in 6 workers with traditional jobs would like to earn money as independent contractors. But should you really ditch your current position to try it out?

It’s a tough decision. Working independently means abandoning some of the comforts that come with full-time employment. It also involves a certain degree of risk. But if you can pull it off, you might feel happier working as a contractor versus an employee.

Here’s everything you should know to make an informed decision.

What is an independent contractor?

Independent contractors are self-employed individuals who provide consulting services to one or more businesses. According to the Department of Labor, contractors aren’t considered employees under the Fair Labor Standards Act. 

The most successful contractors have specialized skills that suit short-term projects. Clients hire them to complete a job, they agree to a fee and deadline, and the contractor completes the work based on the agreement. Once the project is done, the relationship ends, unless another opportunity to work together comes up. 

Let’s look at an example of this type of relationship. If a company needs an auditor to review its finances, it can hire an independent contractor to do the work. The client agrees to pay an hourly rate for the auditor’s services. Then, once the audit is complete, the relationship ends until the client has another project for them — say, next year for their next audit. 

Here, the auditor would have set their fee, managed their own workflow, and used their own tools to complete the job. The client left them to their own devices, trusting that they would complete the job. 

What is an employee?

If you’re used to full-time employment, you may already be piecing together the difference between independent contractors and employees.

As a full-time staff member, you enjoy regular work hours, see the same colleagues each day, and answer to the same manager. And, while your work may be project-based, your salary doesn’t depend on how many projects you complete. Your tasks are also likely oriented toward your company’s long-term strategic plan. 

Employees also enjoy a certain amount of commitment from their employers. Usually, companies hire their staff with the intention of keeping them for a long time.

If you make a mistake or underperform, you’re also more likely to be placed on an improvement plan rather than abandoned and never hired again. That also comes with greater compensation, like healthcare or retirement plan contributions. 

Contractor versus employee pros and cons

Full-time employment is still the standard, but contract work is gaining ground. Whether they drove for Uber or offered accounting services, 16% of Americans have performed some kind of gig work in their lives. Very few of them did it full-time, but most — 82% — said they were happier working on their own than as an employee at a company.

But is it right for you? Here are some pros and cons of contract work versus full-time employment to help you decide.

Pros and cons of working as a contractor

Pros: 

• Independence. As a contractor, you get to be your own boss and answer only to yourself and your clients. You also have the freedom to choose what projects to accept and how to complete them.

• Financial control. You have a higher degree of control over all aspects of your finances. You negotiate your fees, manage your payments and income, and control how you reinvest your funds into your business.

• Flexible schedule. Increased independence means more control over your own hours. As long as you meet your deadlines and attend any required meetings, you can work as early or as late as you want.

• Variety. Each client will present a different challenge. Learn to apply your problem-solving skills in different sectors and meet teams from across your industry — or industries. 

• Passion. Freelancing allows you to accept projects you care about. As long as you’re meeting your financial goals, focus on the skills and clients you want to work with. 
• Side hustles. If you’re looking to start freelancing or consulting on the side of your full-time job to reap the benefits of being overemployed, contracting could be a great side hustle. Just make sure your employment contract doesn’t include a non-compete clause.

Cons:

• Limited perks and benefits. As a freelancer, you’ll have to pay for your own dental and health insurance and social security. There’s also no such thing as a “paid vacation” — you’ll have to say no to certain projects and forego income if you want time off.

• Risk of burnout. Some gigs pay less than others. If you’re in a less lucrative industry (or you’re just starting out), you’ll have to put in more time to earn your desired wage. Plus, a flexible work schedule blurs the lines between work and home life, potentially leading to poor work-life balance or even burnout.

• Inconsistent income. As a contractor, your relationship with your clients is business-only. While consistent client work is common, they can quickly choose not to employ you if they don’t need your services anymore. This can make long-term financial planning difficult.

• Extra marketing duties. On top of the day-to-day tasks of your work, you’ll also have to market yourself through online platforms like LinkedIn. You’ll also need to cultivate a professional brand and attend in-person networking events. This can take time away from your passion projects or add on to already long days.
• Income taxes. When comparing contractors versus employees, taxes are also an important consideration. Companies use income tax withholding when paying workers’ compensation, which means workers don’t have to worry about filing their own taxes.
  
  But to avoid misclassification as a regular employee, contractors have to fill and file their own tax forms. They must also pay a self-employment tax to the Internal Revenue Service (IRS), which covers the social security tax, medicare taxes, and unemployment taxes — all of which are usually managed by employers.

Pros and cons of being an employee

Pros:

• A steady paycheck. Whether you earn a salary or an hourly rate, your company will pay you consistently as an employee. This means you’re less likely to worry about paying bills on time.

• Vacation pay. A common employee benefit when working for a company is paid time off (commonly referred to as “PTO”). If you value traveling or extended vacations, you can do so without sacrificing income.

• Fixed hours. The flexibility of contract work is appealing, but it can easily interfere with your personal life. Working a regular 9–5 can help separate “work time” and “leisure time,” facilitating a better work-life balance.
• One job to do. As an employee, your company hires you to fulfill a role and assign tasks accordingly. You don’t need to worry about finding clients, marketing yourself, and managing your own business finances — your employer does that for you.

Cons:

• Lack of control. Your company may have strict policies and processes on how you can complete your tasks. These may force you to adapt your work style rather than work in a way you’re comfortable with.

• Job security. Relying on a single source of income increases your risk of financial hardship should you lose your job. Contracting, on the other hand, diversifies your income to keep money coming in. 

• Risk of poor management. There are many good bosses out there, but there are also bad ones. As a full-time employee, you risk falling under the supervision of a micromanager or an otherwise toxic leader. Over time this can affect your mental health and increase your risk of burnout.

• Fewer development opportunities. Less variety in your work means fewer opportunities to stretch your skills. Once you plateau, it may take time before you can find a new challenge or earn a promotion.

• Restricted self-expression. Business casual is the standard dress code in most professional environments. This could hurt your morale if you prefer more expressive hairstyles or clothing.

With great independence comes great responsibility 

Choosing to work as an independent contractor versus employee is a personal decision. Contract work isn’t for everyone and requires an extra layer of hustle if you want to succeed. 

As you consider the options, make sure to account for all of the pros and cons and weigh them appropriately. Some tradeoffs may be more important to you than others, so decide what kind of sacrifices you’re comfortable with. A list of what you want most from a job will help you decide.

For example, you may be fine with managing your taxes in exchange for setting your own rates. But the lack of PTO could be a dealbreaker for you — even if it means you have more flexibility the rest of the year.

There’s no wrong answer here. Just don’t quit your day job until you have:

• Enough savings so you don’t need unemployment insurance in the event of a slow start
• A clear self-promotion strategy (or the beginnings of one) to find consistent work
• A plan to cover your healthcare in case of emergencies
• A portfolio for prospective clients to browse (if relevant to your industry)

And, if you have any doubts, you can also try working with a career coach or finding a mentor who has done it before.

Without the support of a human resources department, you’ll also have to familiarize yourself with employment law and your commitments to the IRS. As a taxpayer, you’ll have to self-declare your worker status to avoid misclassifying yourself.

Contracting is appealing to anyone who wants more independence in their work. But you have to be ready to accept the increased responsibility. If you are, your grit and hustle will set you up for success.