Who is an independent contractor?

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors.

If you are an independent contractor, you are self-employed. 

(Source: IRS.gov)


Contracting may be for you if you relate to these points:

  • You want the choice to be selective of those you work with and work according to your preference.
  • You love variety in your life – “Are you kidding? One job for a life?!!” or even the thought of working for the same employer for 5-10 years brings shivers down your spine!
  • You want to be in control; the independence to manage your time is the major lure for working independently.
  • You are a fast learner and know how to implement your ideas independently. The learning curve is also very high when working independently; you learn marketing sales and finance management all at the same time.

However the wants may be many but reality hits hard if you cannot meet your needs first. No matter how much you may want the independence, the variety and being in control freedom, you have to bring in a steady income and plan on sustenance of your business. Work hard to hone your business acumen to ensure a steady start and ongoing success.

The above are most certainly the upsides of a contracting job, however the downsides sometimes outweigh the upsides of a contracting job:

Why being a contractor can be tough?

  • No or limited benefits, contract positions are generally not covered under 401(k) plans and other benefits that are available to a permanent employee.
  • No guaranteed income you maybe in a good paying contract for months together but be prepared to be “on the bench” for a long time too – especially when the going gets tough for the employers, the first headcount crush comes to the contracting positions.
  • Your vacations are unpaid and you may not even take leave during a contract depending on the project deadlines or contracting agreement.
  • You would end up paying your own Social Security and income taxes and for those ever-expensive health coverage, so keep in mind all these points when setting your hourly rates as a contractor.
You may also want to read this informative piece on SBA.gov outlining the differences between a contractor and an employee: Independent Contractors vs. Employees

Estimating your asking rates

One question that most new contract employees have tough time deciding –

What should be my hourly rate, especially in the tough economy, will the employer pay what I ask for?

One of the most tested way to decide on this is first to look up or check with other professional contractors in your field and assess accordingly on your asking rate.
And of course, statistics always are the best way to come to a final close figure. As you have read in the downsides above – you are the person responsible for the many payments on health care, social security and other business expenses (plus covering all costs when no steady income is coming in).

Salary.com has an relevant article on this topic, they say:

If you work as an independent contractor without going through an agency, you have some leeway in establishing your professional fees, but you should charge close to market. To calculate this rate, start with the prevailing full-time salary for that job. Then divide by 2080, the number of work hours in a year (2080 = 52 X 40). This is the hourly rate for your job if benefits are being paid for by the employer.But as a contractor, you need to pay for your own benefits, as well as additional Social Security contributions, so the number needs to be higher. Salary.com uses an adjustment factor of 30 percent to convert an hourly wage for a salaried employee to an hourly wage for a contract employee. Multiply your unadjusted hourly rate by (1 + 0.3) to get your adjusted hourly rate. For example, if your unadjusted hourly rate comes out to $20 per hour, your contract rate should be $20 * (1.3) = $26.

An example shows how this works for a senior-level web designer in Kansas City. A Web designer III working in Kansas City makes $66,244. The unadjusted hourly rate for this position is $66,244/2,080, or $31.85. Adjusted by 30 percent, the contract rate comes to $41.40.
Contracting may or may not be the right option for you; though the downsides may loom large over the positives it is up to you in the end to make a contracting position most beneficial and profitable. And during an economic downturn when most of the permanent positions are being axed left and right a contract position could be an alternative.


Question: What has been your experience with a contracting job? Would you prefer it as opposed to a full-time job?