Free Agents: The World of Independent Contractors
There's a lot of information in the news about working freelance, or as free agents. Some articles describe workers who are fulfilling their dreams by working on their own. Others describe workers who turn to contract work in desperation when they lose their jobs and can't find another one.
If you're thinking about this kind of work, be familiar with answers to these questions before you start:
- How is a free agent legally different from an employee?
- What are the chief differences between freelance and salaried work?
- What are the pros and cons of working as a free agent?
- How can you protect yourself if you work independently?
Employee or Free Agent?
There are many terms to describe workers who are not employees. They include:
Free agent
Freelancer or freelance worker
Contract worker
Independent contractor
Consultant
Sole proprietor
Self-employed
No term is legally more correct than others. The important difference is between being one of those terms and an employee.
Legally, you are a free agent if you offer your services for hire to the public. Various people or companies hire you. They pay you a fee for doing something. Those who hire you control only the outcome of your service - the deliverable. You, the free agent, control how you do your work.
On the other hand, employers supervise their employees and how they do their work. Employers also must withhold income taxes from employee wages, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.
Employers do not have to withhold or pay any taxes for free agents.
Freelance or Salaried Work?
Free agents cannot perform every kind of work. But the U.S. Department of Labor says that nearly 10 million workers, 7.5% of the workforce, describe themselves as self-employed.
Examples include auctioneers, writers, dentists, cabinetmakers, trainers, pet sitters, and computer technicians.
You may start freelance work to fulfill a dream. Or you may start because you've lost a job. Whatever your reason, as you switch from employee to free agent:
- See yourself as a valuable problem-solver who can meet the needs of those who hire your services.
- Get ready to take on many more roles than you probably had as an employee. In addition to the actual service you provide, you also need to market yourself, set prices, negotiate misunderstandings about your work, collect fees, and stay current in your field.
- Figure out how to manage your personal and family budget when it's feast or famine. You're likely to have lots of contracts, and income, one month and none the next.
- Give yourself time to make contacts and become known. Be prepared for feeling like the outsider on each new contract. Try to join with other free agents, at least informally, to overcome isolation.
Pros and Cons
Being your own boss, having a flexible schedule, choosing whom you want to work for - free agents give these main reasons for liking their work.
Flip those reasons over, though, and you also have the downside of free agent work. To be your own boss, you usually have to market yourself all the time. To have a flexible schedule may mean that you work 100 hours one week and 10 the next. If you're worried about when the next contract will come in, you may feel like you always have to say yes to an offer.
Some workers love the self-marketing, the constant networking, the flexibility, the connection with many different clients. What about you?
Many free agents value their good cash flow. Clients don't deduct income, Social Security, or Medicare taxes from the fees they pay to free agents. So the fee for a piece of work can seem quite high.
But remember that you must estimate and pay your taxes every quarter, on your own. Are you good at saving? You need to save enough from the fees you receive to cover those taxes and other expenses.
Set your prices high enough so that you can buy your own health and disability insurance. Free agents also don't receive unemployment benefits, workers' compensation, or paid holiday or vacation time. You must cover those costs on your own. Taking a week off for a vacation or being sick means no pay for that week.
Many free agents find that a written contract is their best protection if something goes wrong. It's also a good idea to understand the Internal Revenue Service (IRS) rules on employees vs. free agents. If you work for only one client and act almost like their employee, the IRS may require the client to give you the same benefits that their employees receive and to withhold taxes.
Additional Resources
Internal Revenue Service (IRS) Rules for Independent
Contractors
Find out what taxes you have to pay, and how, if you work as a
freelancer.
Wall Street
Journal's Center for Entrepreneurs
Read new articles, ask questions of experts, and join online
discussions with people who work as free agents.
Books
Find these books online at Barnes and Noble.com
150 Jobs You Can Start Today: Creative Ways to Make Money Now, Deborah Jackson, Broadway Books, 2003. Take charge of your work life with one of these free agent ideas.
Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants Attorney Stephen Fishman, (book or eBook), Nolo Press, 2006. All the legal and tax basics you need to know to sell personal services such as consulting, writing, or photography.
