I’ve worked as both a W-2 employee, and a 1099 contractor. Nobody told me that it’s not just changing the way you file your taxes each year – it’s adapting to an entirely new way of working.
When I made the shift, I had very little guidance and had to learn some lessons the hard way. If you’ve spent your career as a full-time employee and you’re newer to independent contracting, these are a few things worth knowing ahead of time.
First of all: TAXES work very differently. As a W-2 employee, your employer handles all the withholdings and pays half of Social Security and Medicare. As a 1099 contractor, nothing is withheld, and you pay everything yourself including self-employment taxes & regular income taxes. You generally need to pay estimated taxes quarterly (not what I did in the past, but now I definitely would). This method also helps you have a clearer picture of your finances. And that all means setting aside between 25-35% of every check you get to cover taxes. The upside? Your business expenses are deductible, and so is half of your self-employment tax. Even if you hire a CPA for just one in-depth assessment of your financials, it’ll be worth it! There are often free resources for financial advice in your local municipality, such as the Small Business Development Center (SBDC).
BENEFITS – yep, that’s all on you as well as a 1099 contractor: health insurance, PTO, retirement contributions, etc. An employer isn’t covering these expenses, so you must build them into your rate. In the past I set a general rule to simply set aside 40-45% of every check to cover the taxes above, and all benefits. (This is why you can – and should – charge a higher rate as a contractor.)
AGENCY -vs- FULLY INDEPENDENT – however, there is a difference between working through an agency (such as RevUp*) vs. fully independently. When you contract through an agency, they’re doing a lot of back-end work that you’d normally be doing yourself: business development, project management, handling invoicing and billing, etc. Accepting or offering a lower rate to allow for this kind of partnership means the work comes to you without you having to seek every new project yourself, and all of those back-end logistics are covered. I’ve found it to be a win-win, and it can mean more consistent work for you – or at the very least, a collaborative network that can be considering you for new projects while you’re busy doing other things.
*Our business model hires independent contractors, however our aim is to treat them as a member of our team. We call our contractors ‘partners’ because we see them as genuine colleagues – experts on our bench – that provide the best work, and best service, to our clients.
WORKING HOURS – this will be a big shift! As a W-2 employee, you’re generally expected to fill hours within a set schedule (i.e. 9-5 M-F). As a contractor, you usually have a certain number of capped hours that you agree upon with each client. The latter allows for greater flexibility, however your clients’ needs still come first – you must be available when they need you or they may not come back to you for more support. And repeat clients are a significantly lower lift than trying to find new ones.
WORKLOAD – this will always be variable. When projects and new leads are inconsistent, as a contractor you’ll be tempted to say ‘yes’ to everything – no matter how full your plate. This means you could be slammed one month, and have almost no work the next. Planning ahead and budgeting during the busy months will create security. This means setting aside extra income when you can, and utilizing slower months to actively network, reconnect with past clients, and seek new ones. It’s an important skill to learn!
CHOICE – this is one of the best parts of being a contractor. Don’t vibe with a client, or don’t agree with their values? You can turn them down. As a W-2 employee, your work and clients are determined by your employer – and hopefully their values are aligned with yours. As a contractor, you have the power to decide which projects, companies, or organizations you say ‘yes’ to, which ones you continue working with or terminate partnership with, and ultimately how much work you take on.
I hope this is a helpful resource to anyone taking the leap from W-2 to 1099! If you’ve made the shift, what other tips or words of wisdom can you provide to new contractors?
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Post written by Beth Bogdewiecz, Executive Assistant and Manger of Operations & Marketing at RevUp Growth Partners