There can be huge perks to being a full-time independent contractor: You set your own schedule. You decide what work you do and don’t want to do. You often make more money – and in some cases can really blow off the ceiling of your potential earnings.
However, before joining the land of the 1099 employees (1099 = the tax form you’ll be getting instead of a W2), make sure you’ve thought through the following five changes that will be coming your way, so you don’t get caught off guard or under prepared.
1. Your taxes will dramatically change. When you’re an employee, your employer pays half of your Social Security and Medicare taxes. As an independent contractor, you’ll be responsible for paying both halves – as well as a self-employment tax! And payroll taxes will not be deducted from your paychecks, which means that you need to be disciplined about setting aside cash regularly and making the quarterly payments the IRS requires.
2. You won’t get paid vacation or sick time. As a contractor, you won’t get the normal benefits package employers offer to employees. Typically for contractors, if you don’t work, you don’t get paid. So it’s important to set aside money that will allow you to “pay yourself” for time that you take off from work or are unexpectedly ill.
3. You’ll need to purchase your own health insurance. Fortunately, the healthcare marketplace makes this is easier to do now than it used to be for many people, but it’s an added expense that you’ll need to factor into your budget. And it’s often much more expensive when you don’t have an employer footing a portion of the bill.
4. You should think about other forms of insurance too, like life insurance. Since you won’t be getting any amount of life insurance through an employer, you may need to purchase a policy on your own. If you have family members who depend on you for financial support, term life insurance can help provide financial security to them. You want to make sure your family wouldn’t be in a bind or need to deplete emergency savings to cover day-to-day expenses or significant debt if you were to die.
Life insurance is often very affordable, especially when you compare it to the money you pay in taxes and for health insurance as a 1099-er. Haven Life, the sponsor of this post, is one place to go for quality term life insurance. You can apply online, and if approved, get covered in 20 minutes.
5. You should charge much more than did as an employee. Because of all the factors above, the fee you charge for your work should be significantly higher than what you charged as an employee. A common rule of thumb is to figure out what your salary as an employee broke down to hourly and then double it. (But of course, before you settle on anything, research your market and figure out what makes sense in your context.)
Life insurance needs aren't one-size-fits-all.Calculate your needs
This post originally appeared on Ask A Manager. Alison is the founder and writer behind Ask A Manager, a blog that aims to help you understand what your manager is thinking, how to ask for a raise and various other career concerns. She encourages you to ask away: email@example.com.
Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.