5 Things to Know About Independent Contracting

When it comes to thinking about the type of position that’s going to be best for you, there are several factors to consider and it can be somewhat overwhelming to know which you should choose. 

One of the toughest factors to understand is the difference between an independent contracting (1099) position vs an employee (W2) position. 

The reason this can be tough is because there are a lot of intricate details between the positions and each one has it’s advantages and disadvantages. There is certainly no “right” or “wrong” decision because everyone’s situation is going to be different. 

With that being said, one of my main goals is to help you make as informed of a decision as possible, especially when there is a financial implication involved. So let’s break down FIVE key differences with how an independent contracting position differs from an employee position. 

1. Compensation Package: The first thing you’ll notice with independent contracting positions is the compensation package. The pay is often significantly higher than what you would be offered for an employee position. For example, in Arizona for pediatric home health an employee position might pay around $40-$50 per hour whereas an independent contracting position will pay between $60-$80 per hour. A [VERY] general rule of thumb is that independent contracting pay is roughly 20% higher than what you’d expect with an employee position. So if a company offers you an independent contracting position, you need to know what the market value is for regular ol’ employee positions to make sure the pay is higher. If you’re not sure what I mean by “market value” check out THIS blog post where I talk more about this in the context of negotiation. Be sure you have a FULL picture of what pay will look like including your pay schedule - you can ask about this during the interview. 

    

2. Work Life: When you’re hired as an independent contractor, your job roles & responsibilities will still be that of a traditional OT. The actual services that you provide will not necessarily be any different - however, the structure of your “day to day” work life may look different. Independent contracting positions typically offer more freedom and flexibility particularly with your work schedule. You don’t need to immediately start working 40 hours if you don’t want to. On the flip side, it may actually be difficult to have a full caseload depending on the setting and because you’re likely paid per visit, your first few paychecks may be kind of rough. However, because these positions don’t come with benefits like PTO, you won’t have to worry about taking time off. Again, on the flip side, this means when you take time off, you won’t get paid. As an independent contracting, you may not have much mentorship, supervision, or interaction with others (depending on setting). It could feel isolating at times which is why it’s so important to find a community and mentorship in other ways like connecting on social media! 

    

3. Benefits: You may be familiar with the typical benefits offered with an employee position including: retirement plans (401k, 403b, etc.), medical benefits (health insurance, dental insurance, etc.), PTO (paid time off or vacation time), CEU (Continuing Education Units) reimbursements, student loan repayment, etc. If you’re an independent contractor, you do not get any of this. Nada. Zip. Zero. Now, don’t let that scare you away just yet because you can absolutely obtain benefits on your own, it’s just going to require more research and guidance. The biggest one that most people are worried about is health insurance. Now if you’re 26, you can be on your parent’s insurance if that’s an option. If you are over the age of 26, I recommend checking out healthcare.gov and the insurance marketplace to explore your options. If you’re feeling extra spunky, you can do a little research into a Health Savings Account (HSA) which I won’t be getting into in this blog post but I do personally have a high deductible plan so that I am eligible for an HSA. 

    

4. Taxes: Let me preface this entire section with saying I am not a licensed or qualified professional to provide legal or financial advice. I highly recommend consulting a Certified Personal Account (CPA) to walk you through everything related to managing your taxes because who wants to deal with the IRS? Not me. If you are an independent contractor, your check will not have ANY deductions or withdrawals, including taxes. This means that you will need to ensure you set aside the correct amount to pay state & federal taxes. The rough estimate here is between 30-35% of your paycheck but again, speak with a CPA so that you know exactly how much needs to be put away. So while the check looks large at first glance, don’t get too excited because some of that is owed to the government. 

    

5. Business Structure: This widely depends on your state & setting you’re planning to do independent contracting with. Some places you are required to actually form a business entity such as an LLC or Limited Liability Corporation. There are other business entities but I personally have an LLC so this is the only one I can speak on. You’ll have to dig around to find out what the requirements are in your state. So we just talked about taxes and here is when the whole “tax write off” conversation comes into play which again, I will not be diving deep into. All I want you to know is that when you have a business (such as an LLC) you get tax advantages that you don’t get with an employee position. You are able to deduct business expenses to reduce your taxable income and hopefully (ideally!) pay less in taxes. This means getting to save more of your hard earned money over time. Yes, this is why you always hear wealthy people talking about taxes and tax loopholes - but that’s another rabbit hole I absolutely cannot go into right now friends. 

Phew. I know, that was a doozy!

It's important to understand the key differences between W2 (employee) vs 1099 (independent contracting) including benefits, pay, and job responsibilities. Independent contracting positions typically come with higher pay, tax benefits and advantages, more autonomy, and increased freedom. These positions can also mean less mentorship/supervision. There's generally a lot to keep up with, additional costs to consider, and quite a bit to manage for yourself and your business which is why it’s not typically recommended for new graduates. However, you know what I say - difficult does not mean impossible! It’s just important to be aware that this route requires extensive research and guidance. 

In order to be successful as a contractor you should keep track of ALL business-related expenses, and start learning about tax deductions. Be sure to put at least 30% of your earned income away for taxes (state and federal) even though the goal is to not owe that much! Lastly just to reiterate, I highly advise, encourage, and recommend speaking with a CPA if you decide to go into independent contracting. 

In my Mirracle Money Method, the first strategy I teach is maximizing your earning potential and independent contracting can be an excellent way to do this. When done right, these positions can definitely help you not only make more money as an OT, but also KEEP more money in your pocket.

For more Independent Contracting resources please check out the following posts from my Instagram:

• Independent Contracting vs Employee Positions

• Is Independent Contracting a Good Idea for New Grads?