Let’s face it, most of us are no longer employees; instead, we are contractors and, in some cases, even sub-contractors to the contractors. This complex web of employees, contractors, and sub-contractors definitely complicates workplace issues such as who is responsible to pay for construction accidents or non-delivery if a contractor is unable to finish their work. As such, here are some reasons why independent contractors need to protect themselves and some tips on what to do if you find yourself in this position.

Understand Your Liability:

This can be complex and depends on where you are, where the client is located, the scope of work, and even where the work will be physically done.  But we probably don’t have time to go through tome contracts law and liability, so let’s keep things simple.

For starters, independent contractors are responsible for their own taxes. This means that you will need to pay Social Security, FICA, Medicare, as well as state and federal income taxes directly out of what you are being paid. Keep this in mind as the combined total of these taxes could add up to roughly 40 percent of your billings.  Even worse failing to report could get you into hot water with the government and this could line to fines or worse.

Beyond this, you might face professional liability. This is the case for accountants, engineers, pharmacists, and an entire slew of profession where you will need to make sure your insurance policies cover the work you are doing for your client. If not, then you could be putting yourself at risk; so, contact your insurance company if you are not sure.

In addition, most states don’t require workmen’s compensation coverage for contractors. This could have massive ramifications for you, and your family, if you are injured on a job site as your client is probably not liable to pay for your injuries. As such, you will need to look at options to help you get covered or risk being saddled with thousands in medical expenses if you were to get injured at “work”.

Another point to remember – contractors don’t have a pension or an employer 401k program. This means that you will need to make your own arrangements for retirement and this will impact how you price your services as a contractor.

Nearly 40 percent of what you make will go to taxes and most financial planners recommend independent contractors set aside anywhere from 15 percent to 50 percent of what you bill – depending on your age and how much you’ve already put away for retirement.

This is a lot of money and it brings us to the final point; know your expenses so that you can set the right rate for your services. You might think that you have little to no overhead, but the reality is that contracts or liable for taxes, insurance, their own retirement savings, and finally covering your day-to-day living expenses – e.g. food, housing, student loans, etc.

Remember, you might not always be billing as there are only so many hours in a day and you will need to sleep sometime. So, the final thing you as a contractor are liable for is knowing your expenses and liabilities and setting a rate which will help you to cover those obligations.

Don’t Let This Scare You:

As you can see contractors have a lot to worry about, but at the same time, millions of Americans are quitting their jobs for something better. So, when it comes to protecting yourself, there are several steps that you can take.

To being with, you need to keep good books, and this means investing in a small business accounting software package, or a subscription service, or a bookkeeping service. Doing so will help you to get your receipts out of that shoebox and into a properly set up general ledger.

This will come in handy when it is tax time as you will have an accurate view of your earnings and your expenses. Beyond this, having your books in order means that you will be able to sit down with an accountant or a tax planner to discuss your financial responsibilities and they take the appropriate steps to maximize your deductions.

At the same time protecting yourself means investing in the insurance policies you will need in case things go wrong. This includes having your own worker’s compensation insurance, professional liability insurance, and general business insurance.

Lastly, sign up for a 401k plan and see if there are any industry organizations you can join which might offer group plans. Remember it is your responsibility to prepare for retirement, so getting something in place today will ensure you won’t have to work forever.

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