As the gig economy grows and new technologies that make remote working simpler and more efficient are developed, many businesses will increasingly rely on freelancers and other 1099 workers.
Working independently as a freelancer or independent contractor allows you to become your own boss, and you can control how and when you work. However, it has several other benefits for your personal and professional life besides being your own boss.
Every 1099 employee and anyone else thinking about becoming self-employed should understand the benefits of working this way and weigh them against the merits of being full-time employees. But first, it is essential to understand the definition of a 1099 employee.
Who is a 1099 Employee?
A 1099 employee is an independent contractor or freelancer who independently offers services to clients and businesses.
The 1099 employees offer their services to multiple clients and are usually self-employed individuals or small business owners. They often work on a contractual and per-project basis, but getting hourly rate gigs is also possible.
These employees have autonomy over how and when they work and pay for all their business expenses, self-employment tax, health insurance and retirement savings plans.
While being a 1099 employee gives you more freedom and flexibility since you are your own boss, it also denies you certain privileges that in-house employees get, such as group medical insurance, and overtime pay.
6 Main Benefits of 1099 Employee
Being a 1099 employee will offer benefits to your personal and professional life. The actual benefits depend on the specific work you do. Here is an overview of some general benefits independent contractors can expect.
1. Flexible Working Conditions
Independent contractors get more flexible working conditions as they can choose when and where to work from, unlike full-time employees.
Self-employed workers control their work schedules as the goal is to deliver the work as agreed in the contract, so it does not matter when you do it.
Most independent contractors tend to work remotely. Therefore, they can work from anywhere in the world and are not tied down to working from a physical office somewhere.
Most self-employed individuals, like web designers and copywriters do not have to lose any working hours stuck in traffic when commuting to the office, which greatly increases their productivity.
2. An Independent Contractor Has Good Work-Life Balance
W2 employees spend a huge part of their day in the office and have very little time for other things. This schedule makes it hard to balance work and other life-related activities like going to the gym or spending time with family.
1099 employees have a better work-life balance since they control their schedules. Freelancers can plan their work to ensure they have enough time to exercise, take kids to school, and for other social interactions such as catching up with friends and family.
Balancing work and life has immense mental and physical benefits, which will also help increase your productivity as a 1099 employee.
3. More Holiday and Travel Opportunities
You will have more time to spare for holidays and travelling when running your own business as a freelancer. Many employees only have their annual paid vacation and the holiday breaks for travelling, but 1099 employees can travel any time they want if they plan their schedules well.
Although you will not get paid vacations as an independent contractor, you should not have difficulties paying for your holiday and travel expenses. You can make more money than W2 employees with a good business strategy.
4. Greater Control Over Your Taxes
As an independent contractor, you are responsible for paying your self-employment and income tax. You will have to keep track of all your business income and expenses to make accurate quarterly estimated tax payments.
All this means is that you have more control over your taxes, unlike wage employees who rely on employer tax withholding.
Independent contractors can take advantage of several legal tax reduction measures to reduce their tax obligation. For example, by contributing more to a retirement savings plan, an independent contractor can reduce what they pay for income and self-employment tax (Medicare and social security tax).
Additionally, an independent contractor is entitled to various tax deductions that can lower the tax bill further. These deductible expenses include office supplies, business insurance payments, business travel and home office expenses.
5. Control Over Who You Work For
Independent contractors and freelancers can choose their clients and the work they do. Since these employees are not tied down to one company, they never have to stick with employers they find unsuitable.
There are often no long-term work commitments for 1099 employees, so it will be easier for you to get out of an arrangement you find unfavorable for you.
6. Independent Contractors Have Higher Income Potential and No Career Limits
Working as an independent contractor will deny you several employee benefits. It will also not give you any job security, but it makes up for this with a higher potential income.
There are no limitations to the hours you can work or the number of clients you can handle at a go, so you can dictate how much you make per day or monthly. What's more, you can also come up with better business ideas that will help you make even more cash.
Many independent contractors will also not have any career limits and restrictions. You can specialize in any field you want, take new courses to diversify your skills and try out new industries. As an independent contractor, you never have to wait for a boss to approve or pay for a new course.
Potential Shortcomings of Being a 1099 Employee
As an independent contractor, it is also good to know the potential shortcomings of being a 1099 employee and not just focus on the benefits. Here is an overview of some of these drawbacks:
1. No Safety Net
You will not have a safety net if you are a 1099 worker, and you will have to look for new clients almost constantly. Many employers will hire an independent contractor for a temporary job, and so the employee has to keep prospecting for new gigs even as they work on the current project.
Looking for new clients is tiring, time-consuming and stressful, but it is an inevitable part of freelancing.
2. You Have to Cover All Your Taxes
Non-employees have to cover all the taxes for their taxable income as an individual and for their small business. The taxes include the 15.3% tax for self-employment that covers Medicare and social security taxes.
Employer contributions will cover half of these taxes for the W2 employees, but 1099 workers pay for everything and can only deduct half of the tax from their income tax payment.
Additionally, the tax form will be more hectic to fill out if you are an independent contractor as you will need to provide more information on your income and expenses. For example, you will have to add data from several 1099 forms for all payments over $600 you receive.
3. You Miss Out on Employee Benefits
Many employers have several benefits for their workforce, which you will miss out on when working independently. For example, many organizations will have life and disability insurance and a retirement plan for their employees. Also, a full-time employee can enjoy other things like unemployment benefits, sick days and workers compensation.
Can 1099 Employees Get Any Employer Benefits?
Although a 1099 worker will miss out on many benefits that a regular employee enjoys, an employer can still provide several perks for their contract labor to help build a strong team and improve productivity.
1. Group health insurance plan
Freelancers often do not have employer-sponsored health insurance cover like regular employees. However, no law stops employers from providing access to the group health insurance plan or helping them buy a plan.
2. Corporate discounts
A company can help 1099 workers do their work more efficiently by giving them access to corporate perks and others, such as travel discounts that the organization already has access to. Some of these benefits, such as travel discounts, can help facilitate job delivery.
3. Educational resources
1099 workers need to sharpen their skills to keep up with the competition in the industry and deliver better results. Therefore training and certification will be valuable resources that employers can provide as an incentive to the workers.
Classes, seminars and other programs that help sharpen freelancer skills are a good incentive to encourage these workers to want to work with your company again in the future.
4. Retirement savings plan
Employers and clients can help 1099 workers access retirement savings plans such as a Simple IRA. Offering a retirement savings plan is a good incentive to encourage freelance workers to work with your company for a long time.
1099 vs W2 Employees: Which One Is Better?
Both 1099 and W2 workers have their benefits and shortcomings, and so the best way to decide between the two is by comparing them side by side.
Also, the choice often depends on your preferences as a worker. Some workers prefer the flexibility of freelance work, while others are looking for the job security that comes with W2 employment.
For employers, the right employee between these two will depend on several factors such as the duration of the tasks, their budget, availability of office space and the degree of supervision the employer wants to retain.
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Being a 1099 worker comes with many benefits, from more work flexibility as you can choose your working time and location to a higher earning potential. Additionally, you will also have more control over your taxes and have the freedom to try out gigs in different industries.
However, it also comes with more responsibilities as you are responsible for paying your own taxes and covering all business expenses, which requires better financial planning and discipline.
That said, it is important to make sure that you also understand all the responsibilities and potential shortcomings of being an independent employee and not just focus on the benefits.