The Disadvantages of Being a Contractor

While contracting has been ubiquitous in industries such as information technology for decades, it is now becoming more and more mainstream across a broad spectrum of professions from law to healthcare. In my neighborhood over half of those employed are contractors, from a aircraft simulator specialist to a small business bookkeeper.

Why is this happening? There are a number of contributing factors:

  • Employers want a more flexible workforce tailored to the business cycle.
  • The move to "project-based" work, in even non-traditional industries such as healthcare.
  • Workers desire to have a more open-ended relationship with their employers regarding when and where they perform their duties. Many workers find the notion of eight or more hours per day in a cubicle farm in a featureless office a very unappealing prospect.
  • The internet and the adoption of mobile technologies - many job functions can be performed anywhere, anytime. Virtual meetings via internet/video conferencing are ideal methods of information exchange.
  • There is no longer any stigma attached to being "self-employed". Years ago a self-employed person was often viewed as someone who couldn't get a "real job".

Regardless of the reasons, the flexible workforce and contract employment are accelerating trends that workers need to adjust to. However, while the advantages of self-employment are many, it is not suitable for everyone. This article explores some of the disadvantages of being a self-employed contractor.

Can You Deal with the Uncertainty of Self Employment?

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Whether or not you are suited to self-employment depends a great deal on your personality and life circumstances (see 6 Traits You Need to Be Self-Employed  and Do You Have the Characteristics of an Entrepreneur?) If you are unable to tolerate a certain degree of anxiety then contracting is probably not for you.

One of the major sources of stress for most workers nowadays is job security, and while regular employees can be the victims of layoffs and downsizing, contract employees have even less security. Having a contract does not necessarily mean you have a job until the contract finishes. Many contract positions are structured so that the employer can terminate the contract at any time for any reason with a few weeks notice (as stipulated in the contract). There is also no guarantee of renewal at the end of a contract period.

As a contractor, unless you are lucky or talented enough to be in a situation where your services are in high demand you will always have to be on the lookout for new contract opportunities, and many people are uncomfortable with constantly having to “market” themselves (selling your services successfully in today’s environment requires a multi-faceted approach – Social Media marketing using Facebook, Twitter, LinkedIn, etc. as well as the traditional methods of advertising such as business cards, etc).

Another source of anxiety with self-employment is waiting payment for services rendered. Unless the employer is in financial difficulty a salaried employee can expect regular paychecks on fixed dates – this is not the case for most contractors, who must submit an invoice and wait for payment. Payment due intervals are normally stipulated in the contract, but in my experience these are often ignored by employers and I have waited as long as 60 to 90 days for payment in some instances. (7 Ways to Make Sure Customers & Clients Pay What They Owe You will help you get around this problem.)

If your life circumstances are such that you happen to be the sole breadwinner with a family of dependents, the uncertainties of self-employment can be very stressful.

See Also:

How to Create a Business Page on Facebook

5 Tips for Promoting Your Business on Twitter

Leverage LinkedIn to Increase Your Business

Why Use Business Cards

As a Contractor Your Time is Not Your Own

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In my experience employers tend to be more demanding of contractors than regular employees (particularly unionized employees). In a mixed work environment of contractors and regular employees the contractors are often stuck with rush projects that require extra hours during evenings and weekends.

Many of my acquaintances who are self-employed are used to being called, texted, or paged at any time of the day or night by their employer(s) and asked to instantly respond to whatever issue has arisen. After all, regular salaried employees who are not compensated for overtime are not going to be particularly interested in solving whatever the problem is.

And while contractors are typically paid by the hour and thereby compensated for however many hours they put in, those hours are compensated at the regular rate, not an overtime rate - and come with the added bonus of playing havoc with your family life. People are generally not keen to have their spouses working every weekend or working late night after night.

And vacations can become a thing of the past – it is not uncommon for a busy independent contractor to forgo taking holidays for years at a time.

Being a Contractor Means Running a Business

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Unlike a salaried employee in most cases entering into a contract work arrangement with a business requires that you have your own registered business, which means additional accounting and paperwork.

Your business may be a Sole Proprietorship or an Corporation, but generally it is wise to incorporate if there may be liability attached to the work you perform. (Nowadays many businesses or contracting/employment agencies demand that contract workers be incorporated.)

Running your own business gives you some tax benefits but in order to take advantage of them you must segregate your business activities and expenses from the personal which means maintaining a separate business bank account, business phone, etc.

All of your business expenses will need to be documented and receipts saved for tax purposes. (See How to Keep Your Business Receipts Organized). Separating your business activities from the personal and maintaining proper records of business expenses is important as it helps to legitimize your business in the eyes of the tax authorities.

Your business should be charging GST/HST to your client for your services, so you will need to keep track of GST/HST and (depending on your income) file quarterly or annual GST/HST returns.

If your business is a corporation you will be required to file annual reports. The good news is that the expenses related to all of these activities all fully tax deductible.

Depending on the type of business, the additional paperwork can require a significant amount of (unpaid!) time unless you hire a bookkeeper or accountant, which is then an added expense (although fully tax deductible).

Contractors Have No Employee Benefits

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As a contractor you will not be eligible for regular employee benefits such as vacations, healthcare, sick leave, life insurance, retirement contributions, etc. For a salaried employee the cost of benefits to the employer adds 20 - 40% to the base salary. Typically a contract employee makes up for this by charging a higher hourly rate.

As a contractor you will therefore need to arrange your own benefits as required. If you happen to work through a contracting agency they may offer a benefit package (for a fee subtracted from your hourly rate) or if you are a member of a professional organization, they may offer group rates for medical and life insurance.

If you are supporting a family the cost of benefits is an even bigger consideration. Many employers provide generous family benefit packages that would be much more expensive to obtain as a self-employed contractor. (Because of this, the ideal situation for a contractor is to have a spouse who is a salaried employee with benefits.)

Independent contractors are not eligible for sick leave, making contract employment a poor choice for those with a history of health problems. The uncertainty of self-employment also makes planning/taking vacations very difficult. Where possible most contractors try to take time off between contracts. 

Are You an Employee or a Contractor?

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An employer of an independent contractor does not have to withhold income tax, pension, or employment insurance deductions as with an employee. While this is attractive from an employer standpoint, it has led to abuses of the practice which in some cases has led the Canada Revenue Agency or IRS to deem that a contractor was in fact an employee.

 The consequences of this are severe – if the CRA/IRS decides that your relationship with your employer does not qualify you as an independent contractor you will lose the ability to deduct business expenses and will likely be required to repay expenses deducted in previous years. (See Contractors Beware if the CRA Declares You a Personal Services Corporation! for more details.)

The CRA/IRS uses several criteria to determine if you are an employee or self-employed. One of the most common examples of where this has been challenged in the past by tax authorities is when a regular employee “quits” an organization and then is rehired on a contract basis and continues to work solely for the same employer and perform the same duties.

To maintain your tax status as an independent contractor it is wise to have more than one client. Avoid working long-term for a single employer.

The increasingly common practice of classifying new hires as independent contractors is also being challenged in the courts. Ride-sharing tech startups Uber and Lyft are now battling class-action lawsuits over this issue.