Top 7 Solutions to the Key Disadvantages of Being an Independent Contractor (+ Earn More!)
Are the disadvantages of being an independent contractor holding you back? I'm sharing the key solutions to overcome all of them so you can take full advantage of the upsides (including earning more).
The freedom of being an independent contractor sounds amazing, but if you're anything like me, you want to avoid the major disadvantages of being an independent contractor. As a lawyer myself who drafts contracts for independent contractors like you, I'm sharing the critical solutions to all the downsides.
You will learn all about the simple steps you must take to tackle the key disadvantages of being an independent contractor, so there's no need for a list of pros and cons of being a contractor vs employee, as you'll be enjoying all the advantages and disadvantages of being an independent contractor are no longer your problem.
After learning all about the simple solutions to the key disadvantages of being an independent contractor, you'll enjoy all the benefits of being self-employed and earn more!
This post is all about the crucial steps to overcoming the key disadvantages of being an independent contractor so that you will thrive as an entrepreneur.
Key Disadvantages of Being an Independent Contractor
The best solutions to combat the key disadvantages of being a contractor
1. Limited job security
One of the disadvantages of being an independent contractor is limited job security.
Even though the level of job security for employees differs per country, as an independent contractor, you'll always have more limited job security than employees.
If you don't have the proper protections in place, your clients can terminate your contract at any time with relatively short notice.
So, how do you overcome this first one of the disadvantages of being an independent contractor? Here are the key solutions to overcoming limited job security:
Set a minimum term: Agree on a minimum term with your clients, like 6 to 12 months. Ensure that the minimum term is not too long, though, as in certain cases, you might be reclassified by the tax authorities as an employee (which I'll discuss in this blog, too). This will enable you to predict and plan your workload.
Set a termination notice period: Include a minimum notice period, like 1 to 3 months before terminating the contract. This gives you time to find other work and reduces the risk of immediate job loss.
Retainers: Request a retainer for ongoing work, meaning your client pays you a fixed fee on a monthly basis for a fixed number of hours or certain fixed services. This payment arrangement provides you with a steady stream of income.
With these solutions in your independent contractor agreement, you'll have more job security!
2. No employee benefits
Another one of the major disadvantages of being an independent contractor is that you won't have any employee benefits.
This also depends on your country and the type of company you would otherwise work for, but as an independent contractor, you might be missing out on some great benefits like health insurance and pension plans.
So, how do you overcome this first one of the disadvantages of being an independent contractor? Here are the key solutions to the lack of employee benefits:
Factor the lack of benefits into your rate: When setting your rates, factor in the costs you would need to cover the costs of healthcare and what you need for your pension. Keep in mind that you are a lot cheaper for a company than an employee is. That's not only because they don't need to give you any benefits but also because they don't need to pay employment taxes and social security contributions. So, you should ask for more!
Annual rate adjustments: Ensure you have inflation and increases in your overall costs covered by incorporating a fee index into your contract (a percentage by which your hourly or fixed fee is increased each year).
Find substitutes: Explore health insurance and (tax-exempt) savings options for self-employed persons that you could benefit from in your country. Especially with the rise of self-employment globally, many governments, banks, and insurance companies have created great substitutes for self-employed persons.
Invest like a real entrepreneur: As an independent contractor, you must think like an entrepreneur. Successful entrepreneurs don't put all their eggs in one basket; they invest their money into stocks and real estate. Don't just focus on putting in your time for money. Make your money grow without your labour!
3. No paid holidays
The next one of the key disadvantages of being an independent contractor is that you'll have no paid holidays.
Whether that's a major disadvantage to you depends on the country you live in and the companies you've worked for. In some countries, workers have a right to up to 2 months of vacation a year. In other countries, workers only get 2 weeks of paid holidays, and in others, workers don't have any rights to paid holidays at all, while certain companies do offer paid leave as part of their package.
But what can you do if this is one of the disadvantages of being an independent contractor for you? Here are some solutions:
Right to "freeze" your services: As you are not an employee, you don't have to ask for time off. But you also don't want to terminate your contract or have your client terminate the contract if you do want to take a break. Therefore, you should include a right to "freeze" your services in your contract, meaning that you can determine whenever you take a break (while giving your clients advance notice). So, you have the legal right to your freedom without any consequences!
Fixed monthly fee: Another option is to provide your services at a fixed fee and to work ahead so you still deliver all your services that month. That way, you can go on holiday without suffering a decrease in income! However, this method will not work for all types of freelance work (like a personal assistant who needs to be available on certain days of every week or anyone who is paid based on time).
Better boundaries: An option that many different independent contractors can implement is boundaries on availability and time. Control over your time is so valuable, and that is why I've created iron-clad boundaries around time in my contract template for independent contractors. If you have control over your time, you won't need to worry about taking a break!
4. Inconsistent income and lack of a steady paycheck
The next one of the key disadvantages of being an independent contractor is inconsistent income or lack of a steady paycheck.
Because you do different work for different clients at different times, your cash flow is going to differ from month to month. Especially in the beginning, you'll have very dry months and some really good months, which can be hard to navigate.
So, what do you do about this one of the disadvantages of being an independent contractor? Here are the key solutions to inconsistent income or lack of a steady paycheck:
Milestone payments: If you're working on a project basis, you can include milestone payment schedules in your contract. This way, you'll create a more consistent cash flow as you'll paid after completing each stage of your projects, and you won't have to wait until the end of a project to get paid.
Deposit clause: Another option if you work on a project basis is to include an upfront deposit in your contract, which your clients are required to pay before you start working for them. This payment structure gives you the security of getting paid and provides immediate income.
Retainer agreements: If you provide ongoing services that are about the same each month, you could charge a retainer fee. By charging a fixed monthly payment, you'll create a steady paycheck for yourself.
Wondering about what pricing model you should use for your services? Read The Complete List of 15 Pricing Models for Services PLUS Guidance on the Perfect Pricing Model for You.
5. Tax issues and withholding your own taxes
Another one of the disadvantages of being an independent contractor is having to withhold your own taxes and the tax issues if you don't properly file your taxes.
Unlike employees, you must spend quite some time on all this admin work, and that can feel burdensome, especially when figuring it all out in the beginning.
So, how do you overcome this annoying one of the disadvantages of being an independent contractor? Here are the key solutions to your tax issues and headaches:
Tax calculator: There are so many great free tax calculators online that will tell you exactly what percentage of your income you'll need to save based on what you think you'll make that year. And don't worry if you're just starting out and you're not sure yet. Simply recalculate and adjust your savings as you go along.
Income and expense tracker: Make it a habit to track your income and expenses each month in either an Excel sheet (if you're old school, like me) or an accounting software. That way, it's way easier to track your profit and see whether you're saving enough for your taxes.
Pay the tax before yourself: Once you have figured out your income and profits for the month and what you owe in taxes, ensure you keep aside what you need to pay in taxes (in either your business account or a separate account) first. Then, allow yourself to pay yourself a salary. That way, you won't get into any tax issues. Simple!
Tax advisor: Some independent contractors who are great with numbers and confident in their tax knowledge will file their annual taxes themselves. If you're like me, and you're not 100% sure what you're doing and what tax benefits you could use, I recommend skipping the headache and just hiring a tax advisor to handle your annual taxes.
Payment terms: Structure clients' payment schedules to align with your tax obligations so you don't have to worry about having enough in your bank account to pay your quarterly or annual taxes. If you charge a retainer, then you can have your clients pay you in advance. If you are paid on a time-spent basis, make the payment terms short, like 14 to 30 days.
6. Risk of worker misclassification
One of the scariest disadvantages of being an independent contractor is the risk of worker misclassification. If the tax authorities determine you're factually an employee, that can result in fines and liability for back taxes and social security contributions.
Independent contractor clauses: Clearly state in your contract (1) your status as an independent contractor and (2) clauses that emphasise your autonomy in completing tasks (you decide how, when and where you work). These contract essentials help protect you from the risk of worker reclassification.
Factual control: You can have all the right clauses in your contract, but if, in reality, your client controls how, when, and where you perform your work, you still run the risk of worker reclassification. So, make sure that you avoid practices that resemble an employee-employer relationship.
Misclassification indemnity: Include an indemnity for misclassification indemnity clause in your contract so that your client will indemnify you in case the tax authorities do classify you as an employee and charge fines, back taxes, or social security contributions. That way, it's clear that the risk remains with your client, and you are not responsible for paying any of it.
7. Liability for business debts
Another one of the biggest disadvantages of being an independent contractor is liability for business debts.
As an employee, whatever you need to do your work will be provided by your employer. And, if you make a mistake and something goes wrong, your employer will be responsible for any liabilities in most cases.
But when you're an independent contractor, you are a business owner. That means you (or your own business entity) are liable for your business debts and any legal claims against you.
Liability limitation: Add a limitation of liability in your contract that (1) excludes your liability for most issues and (2) caps your liability toward your client to the payments you have actually received from your client under the contract. That way, you'll never be liable for more than you have.
Client indemnification: Include an indemnification clause in your contract which obligates your client to indemnify you against any claims from any third parties (like the client's customers).
Tax advantages: In most countries, most business debts and expenses can (for a large part) be written off your taxes. Take full advantage of these benefits!
These are all the simple solutions to the key disadvantages of being an independent contractor so you can avoid the disadvantages and take full advantage of the financial and tax benefits of being an independent contractor!
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This post was all about how to completely eliminate the disadvantages of being an independent contractor and thrive as a high-earning entrepreneur.
Learn more about how to avoid all the disadvantages of being an independent contractor in this blog post on the 7 Crucial Boundaries Every Freelancer Needs in a Freelance Contractor Agreement.
Read this blog post on the 13 Key Terms Every Freelance Agreement Template Must Have so that you can create the best advantages and disadvantages of being an independent contractor will no longer be an issue.
Need a contractor-friendly independent contractor agreement? Get the perfect contract template with all the essentials to avoid the disadvantages of being a contractor on this page of my contract shop!
