The Benefits and Risks of Contracting

Hello Everyone! Today I bring you a guest post on the Pros and Risks of Contracting. A very relevant topic for my fellow freelancers out there and some great tips. I have added my thoughts throughout and have a question for you at the end!

If you are thinking about changing from permanent employment to contracting, you probably have a million thoughts and ‘what ifs’ going through your head. Are you finding it difficult to make a decision? Here are a few pros and cons that will help you decide if you have the temperament for contract work.

Contracting

The benefits

First, let’s look at some of the most common reasons why people become contractors.

Higher earning potential

Contractors generally earn more per hour or per project than those who are fully employed, therefore, your overall earning potential increases when you become a contractor. You may also have busy periods, where you work long hours and earn quite vast amounts of money. Be warned however, you will have to market yourself and be prepared to save and manage your money in order to cover yourself for the quieter periods. (SS: Emergency funds are not intended for quieter periods… You should plan seperately for this!)

A more flexible lifestyle

With contracting, comes the freedom to choose your own assignments, locations, and hours. You are in charge of your holiday and how long your leave will be. Originally, you may be tempted to take on every job that comes your way, but after a couple of years – and with a few steady contracts – you will have the freedom of choice. (SS: This is where the Digital Nomad dream comes into play… what is better than working from a beach like my friend Hannah over at FurtherBound?)

More varied experience

Chances are you will gain a great deal of experience that you may not have had working for a single employer. You will also likely be more challenged as a freelancer, as you will no doubt contribute to a wide variety of projects. Should you decide to go into permanent employment one day, you would have filled your CV with a diverse range of work experience and grown your skill set enormously – hence making you a very attractive prospect to future employers! (SS: This is something that I hadn’t thought about too much before, but a very valid point. Future employers would likely respect you for having a shot of self-employment; while it also gives you a great story to tell!

Pay less tax

With the right financial partners and advice, you could save on tax. As an independent contractor you could go onto an umbrella payroll system, where all your tax and admin issues are taken care of for you. Should you decide to start your own Limited Company, a reputable accounting firm can ensure your compliance and help with tax matters.

 

The risks

Now let’s look at the possible pitfalls of being a contractor.


Less security

As a contractor, you face the uncertainty of not knowing when or where your next contract will come in and you could face periods where you don’t have work. If you are a worrier and not good with saving and managing your money, this might be a concern for you. (SS: This shouldn’t be a problem for the disciplined savers who all read SavvyScot …)

More admin

As a permanent employee, someone else took care of administrative issues like paying your tax and NI contribution. It is now up to you to ensure your taxes, accounts, and other paperwork are kept up to date. With reliable help , it needn’t be an issue, but if you are not good with keeping your admin up to date, this might seem daunting. (SS: This is a very decent point… I have only just realised what a nightmare self-assessment tax returns are!)

More responsibility

It is entirely your responsibility to find work, do the work well, and make sure it is completed in time. It is your duty to ensure that you have enough work to sustain your lifestyle. You will have to market yourself, network effectively, and be prepared to take charge. You will not have the luxury of paid-for sick days and will have to put your best foot forward at all times. (SS: Some people thrive under these conditions and actually work better… it doesn’t work this way for everyone)

 

Contracting is not for everyone. However, if you have the right attitude and are prepared to market yourself and work hard, it could prove extremely lucrative and give you the lifestyle you want.  

 

Are you making some good money through a passive income stream? Would you consider contracting full time? I know my friend Ash over at Sterling Effort has recently made the jump….

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Comments

  1. Good breakdown of pros/cons. Running our own business has definitely allowed us to see both sides. But, in the end, the pros outweigh the cons.
    John S @ Frugal Rules recently posted..Festival of Frugality #361, Election Day EditionMy Profile

  2. K.K. @ Living Debt Free Rocks! says:

    As someone one is a self-employed business consultant you definitely need to be very organized and resourceful to run all the administrative & taxation aspects of a business while trying to generate work and then complete it. Otherwise it’s best to spend some money and hire a bookeeper/accountant to handle this.
    K.K. @ Living Debt Free Rocks! recently posted..The Boiling Frog.My Profile

  3. As someone who has been freelancing for four years, I still struggle with the financial instability. I just keep plugging away and hoping for the best.
    Budget & the Beach recently posted..Paying for ConvenienceMy Profile

  4. I definitely have thought about contracting as an option down the road for me. I would like the flexibility and the entrepreneurial spirit of it, but the drawback of less security is difficult to handle. I would have to have better financials to pursue it (i.e. bigger emergency fund, less student debt, etc.).
    DC @ Young Adult Money recently posted..How To Get A House Ready For SaleMy Profile

  5. justin@thefrugalpath says:

    As a contractor you need to be good at self promoting. If you can’t show why you’re better than another contractor you can easily lose the job.
    Also, losing out on benefits like a 401k or health care can lower the extra earning that contractors receive.
    justin@thefrugalpath recently posted..3 Cases Where Extreme Cheapskates End Up Paying MoreMy Profile

  6. Nice breakdown. I actually work in a field where there are many contractors(engineering) and here’s what I’ve learned. At my company, it is very hard to get fired as a direct employee, even if you’re not that good. As a contractor though you can obviously get let go literally without any notice. To make up for this risk you can make up to 1.5-2x more in base salary. You get tax benefits(per diem) that I think make up for the 401k/healthcare type stuff and you can do a HSA if you are a contractor!

    But the main thing is as a contractor you are eligible for OT where you can get 1.5x pay, that’s where the contractors make their money. A lot of them have gotten so used to this salary though they don’t realize this is more of a temporary increase. It’s sad how many contractors work with me in San Diego but their family lives in LA or even some in Arizona! Wow, I would have to get paid a hell of a lot more than a couple hundred thousand to live 500 miles away from my family!
    Harry @ PF Pro recently posted..Do You Invest in Expensive Kitchen Knives? A Review of my Shun Chef’s KnifeMy Profile

    • I am also an engineer (Mechanical and Materials). I am too working in a company where it is difficult to get fired as a direct employee and where contractors come and go! Contractors however get up to 5X the money in some disciplines!!!

      I’m with you on the location front… no amount of money would take me away from my family :)

  7. Great comparison. Personally, I have no interest in being a contractor. I am not much for self-motivation and I like having work handed to me. Less thinking about work, more time for me. :)
    CF recently posted..Paying off $27,000 in student loansMy Profile

  8. I have often considered contracting and once our house is fully paid off I think i will take the plunge.
    The extra money is just too tempting in my field and could easily be the difference of me retiring at 50 Vs 60.
    Glen @ Monster Piggy Bank recently posted..6 easy money SAVING tipsMy Profile

  9. I might be just an Australian thing, but typically being a contract means you have to sort out your own retirement fund/superannuation payments. Lots of contractors I know don’t do it to save money – if you’re an employee, your employer has to by law contribute to your retirement fund.

    Contractors can easily lose out if they don’t pay into their retirement accounts. The higher wage (potentially) is offset by having to pay your own super, together with the other downsides you mention.
    James @ Free in Ten Years recently posted..Monthly report: October 2012My Profile

    • That is definitely also applicable to the UK and probably lots of other places around the world! It’s definitely not for everyone, but providing that you are sensible with money you can often be at a financial advantage – especially from a tax perspective!

  10. I think this is a good analysis. We are trying to do a little of both. We work 9-5 jobs and have passive income streams in addition. Hopefully one day we can quit the daily grind!
    Holly@ClubThrifty recently posted..Craigslist: Great Way to Sell your Crap or Total Pain in the Ass?My Profile

    • I am exactly the same as you guys – best of both worlds and extra hard work until it is big enough to (hopefully) one day support us in full! Then bring on the digital Nomad lifestyle

  11. We’ve taken Holly and Greg’s approach too. We still both have regular jobs, although I’ve been a professional baby hotel and restaurant for the past 4 years – great job satisfactions, bad pay :)
    We’re hoping to reduce our jobs as our passive incomes, and side hustles grow. Time will tell how this approach pays off.
    Mandy @MoneyMasterMom recently posted..The Big CookMy Profile

  12. While there’s less obvious security than working for “the man,” I believe there are two doors in life. One says “security” and the other says “freedom.” The person who chooses the “security” door gets neither.

    Guess which side I’m on? ;-)
    AverageJoe recently posted..How Much Did This Election Really Matter?My Profile

  13. I work as a consultant, and completely agree with everything that you just said. While I lack security, I am blessed to able to decide what I need/want to do.
    Marissa @ Thirtysixmonths recently posted..Work Smarter, Not HarderMy Profile

    • At the end of the day, the thing that sets one contractor apart from the rest is the quality of their output. There are many ways to improve performance and in so doing ensure repeat business.

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  2. The Frugal Path5 Posts to Help you Over the Hump: Election Edition - The Frugal Path says:

    […] Are you considering leaving the security of your job and becoming a contractor? The Savvy Scott has some tips explores The Benefits and Risks of Contracting. […]

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