There are many anecdotal stories about employees leaving their job to become their own bass by working as an independent contractor. This may sound appealing as many people put increased emphasis on working form home and flexible hours. However, there are a number of issues that should be considered before taking the leap.
One such issue is that self-employed individuals pay both the employee’s and the employer’s portion of Social Security and Medicare taxes. Whereas employees typically have their Social Security and Medicare taxes deducted directly from their paychecks, self-employed individuals typically pay roughly twice as much in employment taxes and pay the taxes due with their annual personal income tax filing.
There may also be additional expenses that self-employed individuals may pay. For example, an independent contractor may be required to have business insurance. In addition, if an independent contractor sets up a business entity such as a corporation or LLC there may be additional tax filing fees as well as government taxes and/or fees levied.
Independent contractors may also find that they lose access to an employer sponsored retirement plan which may offer an employer match putting more of the retirement savings burden on the worker. In addition, the cost of other employee benefits, such as health insurance may increase the costs of being self-employed.