Contracting Pros and Cons 4

Money Issues


  • There is a direct connection between work and pay. If there is a real crunch and employees have to work late and/or weekends, they know they either have to pay you to work extra or you don’t get roped in.
  • You may earn more money with each new assignment.
  • The money tends to be much better (for some, at least 30%-50% higher than what companies are willing to pay on salary).
  • If you find you like contracting and start your own consulting business, be sure to do yourself one favor: pay yourself first. This means setting up an unemployment insurance account for yourself with your state agency that is responsible for administering unemployment insurance benefits. Be sure to keep it separate from any personal savings you have so that you also can safeguard those assets you’ve set aside for investments and your retirement.


  • Money - in and out - is a big concern!!
  • Although the hourly rate is usually more, it may not actually pay better in the long run since you have to pay for your own insurance, etc. You have to factor in all the overhead costs that you take for granted as an employee, from making copies to covering vacation and sick days.
  • If you’re working as a 1099 (independent) contractor, you can get stiffed by the client.
  • Self-employment taxes are a killer, and there are all sorts of uncomfortable scenarios that can play out if you don’t pay your taxes until April 15. Make sure you pay your quarterly estimated tax payments to avoid problems in April.
  • Like any small business, the first 2 years are critical. Assess your money situation just as you would if you were opening a store or a restaurant. Most independent professionals are woefully underfunded when they start out. Six months “back-up money” is the minimum; many financial and small business advisors recommend one year. If you don’t have more than six months stashed away now, make saving the first priority after you start. At contracting rates you should save steadily.
  • Watch how you take deductions on equipment and furniture. There are distinct advantages and disadvantages to taking a one-shot deduction or calculating depreciation every year for five years.
  • Some people need to add the cost of an accountant to their annual budget, if they don’t like/want to do their own taxes. And note the use of “accountant” and not “tax preparer.”
  • You need to save every receipt, every copy of a membership renewal form for professional organizations, everything. Figure out your filing system before you start, or you will misplace something.
  • You may want to consult with a lawyer on some standard contracts to make sure they’re fair for all parties, not full of loopholes, and protect you from being cheated out of money or cut short on deadlines. Ever heard of a cheap lawyer?

Other Comments

  • It all depends on what you value. There will ALWAYS be someone out there making more than you do. Make enough to make YOU happy and don’t measure your professional status by the money metric. Embarrassment of riches makes as much sense as embarrassment of being poor, which is to say zero. In and of itself money means nothing - it’s like gasoline - it’s a fuel that allows you to do things - it’s what you do with it that matters.
  • Partners can have concerns about making sure that money keeps coming into the two-income household. Many couples often break up over long-term financial difficulties. Contrary to popular belief, salaried jobs are just as “unstable” as contract work. As soon as a company has a flat quarter or two, it starts to look for people it can lay off – and documentation is often seen as less than essential. A salaried job has no more security than a contract. Sometimes contracting positions can wind up becoming staff employment; and even on long-term assignments you can literally be told after lunch to pack up and get out because the funding has been cut to the program you were working on before lunch.
  • As long as you’re the proud owner of a healthy work ethic and are someone who always hustles during a job search, though, you and your partner should be okay. By taking on W-2 contracts, you save yourself a lot of heartache with the IRS at tax time. You also make sure you get paid. Most of all, though, you also make sure you’re eligible for unemployment benefits if and when your contract assignment ends.
  • If you’re any good at all, you’ll feel that much more professional when you take on a contract assignment. You know what you’re there for and you go out and you do the job you were hired to do. And you do it to the very best of your abilities because this is what you’ve decided on as your career path.
  • Your quotation form should specify all of the criteria you expect, including rate, payment schedule, where you work (at home, on site), and which tasks are billable, such as travel time, special software, and administrative work. You may also like to consider a 90 day window for the quote. That way if somebody doesn’t decide to hire you for a year, you can easily raise the rates with a new quote. It also means that after the first 90 days, you can raise the rates for the “aggravation” factor, if it turns out to be an undesirable job.

Legal Issues

  • Should you get legal advice on contracts? Some people negotiate terms up front; others refer all contracts to lawyers. However, if you are an independent contractor with only one customer, the IRS may give you and/or your employer some trouble. You may need legal advice on this.
  • Another legal aspect which needs to be addressed is the status of contractor or employee. Some time ago, the US Supreme Court ruled that anyone who works as a W-2 contractor for a company for 18 months or more must be hired on by the company as a full-time employee. The US Supreme Court came up with this ruling because of a company named Microsoft. Microsoft would hire contractors, hold onto them for a long time and then fire them and claim they were ineligible for unemployment insurance benefits because they were contractors. As some of these contractors were also on H1-B work visas, it put a lot of imported engineers, programmers and other technology professionals at risk of deportation through loss of sponsorship. The core of the Justice Department’s argument was this: Any company that hires on a contractor to work on a contract and which has enough work to keep him or her busy for 18 months is clearly entitled to all the benefits of full-time employment and must therefore be hired as a full-timer, lest the employer face fines and prison time under the Federal labor laws. In its wisdom, the US Supreme Court agreed with the Justice Department and made the ruling the law of the land.