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