Independent Contractor vs. Employee: The Benefits of Being a Self-Employed Professional
If you’ve been keeping up with the latest trends, you’ll have noticed that a growing segment of the American public is moving away from traditional employment and shifting towards independent contracting. Personally, I think this is a good thing.
Independent contractors—self-employed individuals contracted to work or provide services to another entity—represent around one-third of the American labor force. While this status may offer certain perks such as freedom and autonomy over one's work prospects, there are other benefits to working as an independent contractor, especially in terms of retirement savings.
How We Got Here: Independent Contractors vs. Employees
Saving for one’s security—both in the short-term and for future goals like retirement—as an independent contractor looks a bit different than it does for a traditional employee.
To understand the benefits and challenges of working as an independent contractor, we must first explain the shift in workers moving from traditional employment to independent contracting. Here are three things that are changing the labor landscape as we know it:
Rise of the gig economy
Diminishing employee benefits
Worker empowerment
Rise of the Gig Economy
The pandemic revealed vulnerabilities in the American job market—massive layoffs early in the pandemic, a rise in preferences for flexible work options, and stagnating wage growth amidst rising inflation, to name a few. These weaknesses led many workers to either fully or partially move into something known as the gig economy.
The gig economy is commonly characterized by short-term positions or “gig” work offered to independent contractors by businesses. For many, burnout and frustration from traditional jobs have led them to pursue gig work to supplement their additional expenses or replace their incomes entirely.
Although gig work has traditionally been seen as unstable, I think it’s actually empowered workers to take more control over their finances both now and for their future.
Diminishing Employee Benefits
Additionally, many employers made the decision to cut employee benefits to counteract COVID-19’s effect on the company’s bottom line. These cuts come amidst a broader trend of reducing other employee benefits such as pensions, which were once a way for hardworking Americans to ensure they could retire comfortably.
As employers continue to reduce employee benefits, the incentive to remain loyal to a single company—or even a single industry—over the course of one’s career becomes obsolete.
Individuals who make the transition to independent contracting gain more leverage and autonomy over their time, value, and ability to earn what they need to cover their expenses, save for the future, and reach ambitious goals.
Worker Empowerment
If the Great Resignation could be summed up in a couple of words, worker empowerment would come to mind. The phenomenon that has led millions of Americans to quit their jobs at a record pace has created a new sense of personal empowerment in the average worker. For many, the pandemic was the unexpected push to give them the courage to pivot to something better.
Young workers today value work/life balance, favorable working conditions, and growth opportunities in their careers. This is plenty of incentive for many people to replace traditional employment with independent contracting and learn how to leverage their services for multiple companies at once rather than one company for a long period of time.
Benefits of Becoming an Independent Contractor
The world of independent contractors can be an excellent place for those with an entrepreneurial spirit. In addition to greater freedom and opportunity, independent contractors also enjoy benefits such as streamlined retirement savings plans and more autonomy over their retirement investments.
Streamlined Retirement Savings
As a self-employed individual, you aren’t limited to employer-sponsored retirement plans, which can be cumbersome to keep track of or roll over when you change employers.
As an independent contractor, you will likely have a sole proprietorship, LLC, or other business entity filed with your Secretary of State. Your business structure will allow you to open your own retirement savings account as a self-employed professional and make contributions to that account no matter who you work for.
There are many retirement savings vehicles available to independent contractors, including a solo 401(k) and a SEP-IRA. By funding a retirement account with your business income as an independent contractor, you have more flexibility to save how much you want and where you want without keeping track of multiple 401(k) plans or rollover IRAs.
If or when you do still work for other companies as an employee, you can still participate in their employee retirement plan. There’s no reason why you can’t contribute to both as long as you’re continuing to earn an income from your side hustle.
More Autonomy Over Retirement Investments
Self-employment is the epitome of autonomy and freedom. You are now in control of how you earn your money, how much you charge for your services, and where your money goes. And because your earnings potential is unlimited as an independent contractor, you have more income to invest and grow your wealth over time.
Likewise, as an independent contractor with more control over where you put your retirement savings, you’re not limited to the investment options in an employer's plan. Investment options in an employer-sponsored retirement plan are usually limited to traditional assets such as stocks, bonds, mutual funds, ETFs, and the like. As an independent contractor, you have more freedom to save more of your income in a self-directed IRA if you wish.
Generally speaking, the options available to investors who pair traditional retirement savings accounts with a self-directed IRA can include (but are certainly not limited to):
Cryptocurrency
Precious metals
Farmland
And many more
By investing a portion of your retirement savings in income-producing assets, you have the flexibility to realize greater earning potential, increase your returns, diversify against market volatility, and create passive income streams.
Challenges of Becoming an Independent Contractor
Self-employed life has many benefits, but it isn’t always easy. Painting the picture of the challenges may help you understand how to navigate your retirement savings best. Some challenges that independent contractors face may include volatile income and a greater need for self-discipline.
Volatile Income
Unlike a traditional job, independent contractor jobs often face fluctuating income. Depending on factors like quality of service, demand, and the market for independent contractors in your industry, your income may face periods of lower than normal wages.
To create wealth and retire comfortably, you need to be contributing to your savings goals consistently over a set period. The level of your contributions is based on how much you earn, so a lack of steady income can derail your plans if you don’t have a strategy to account for periods of decreased cash flow.
However, the pandemic taught millions of employees that a consistent paycheck doesn’t necessarily equate to more security. An employer can lay you off or fire you at any time, leaving you scrambling to replace that paycheck with another job as quickly as possible.
As an independent contractor, you can actually build more security for yourself by contracting your services with multiple companies or clients. If one company lets you go, you’ll still have work coming in from your other clients. Plus, you’ll have the systems you need to quickly find more work from other clients when you need to.
Self-Discipline
When saving for retirement as an independent contractor, you’re on your own. There is no employer there to deduct your taxes or invest your contributions. Unless you hire an investment broker, you are solely responsible for the results you garner within your account.
For some, this structure may be outside of their comfort zone. But for dedicated entrepreneurs, this type of discipline is par for the course. The great news is that your discipline and entrepreneurial spirit can help you exceed the retirement expectations of someone in a traditional employment setting.
If done correctly, becoming an independent contractor can place you in a great position to maximize your retirement savings. You have more freedom to invest in a traditional retirement savings vehicle and a self-directed IRA to diversify your holdings between growth assets and income-producing assets.
How Chicago Trust Administration Services Can Help
At Chicago Trust Administration Services, we’ve been helping investors self-direct their futures for 17 years by investing in alternative assets through a self-directed IRA. We help you make transactions in a fast, IRS-compliant manner so you can spend more time researching your various investment opportunities and taking control of your future. To see how we can help, schedule a complimentary meeting by calling 312-869-9394 or emailing steve@ctasira.com.