Is contracting right for you? A guide to becoming an independent contractor

Considering a career as an independent contractor

Thinking about becoming an independent contractor? It can be an exciting path, full of flexibility and opportunities to shape your own career. But contracting also comes with unique responsibilities and challenges that are important to understand before you dive in.

As a contractor, you’re in control—you set your own hours, choose your clients, and decide how to approach your work. This freedom lets you design a career that fits your strengths, passions, and goals. However, with this freedom comes the need for strong self-management. You’ll handle everything from managing your workload to tracking finances, marketing yourself, and ensuring you meet client expectations.

One of the key factors to your success in contracting is preparation. Knowing its ins and outs—like managing taxes, staying compliant, and securing work—will set you up for a smooth start.

What are the primary differences between being an employee and an independent contractor?
The main difference between the two come down to control, payment, taxes, stability, and legal protections, specifically: 

• Control over work: Employees work set hours under company direction; contractors have freedom to set their own schedules and methods.
• Payment & benefits: Employees receive regular pay and benefits like health insurance, while contractors are paid per project and handle their own benefits.
•  Taxes: Employees’ taxes are withheld by employers, while contractors are responsible for their own, including self-employment tax.
• Stability: Employees have job security and consistent pay, while contractors may need to seek new projects regularly.
• Legal protections: Employees have legal rights like minimum wage and overtime pay; contractors, as self-employed, don’t have the same protections.

It’s important to understand the difference between an employee and an independent contractor to avoid misclassification risk. 

Steps to transition into independent contracting

If you’re currently an employee and planning to transition into an independent contractor. Here are some action steps to keep in mind:

1. Structuring your independent contractor business
Establishing your independent contractor business with the right structure can set a strong foundation for growth. Many independent contractors start as a sole trader (or sole proprietor), which is easy to set up and involves minimal paperwork. However, forming an LLC (Limited Liability Company) is another popular option, as it can protect your personal assets from business liabilities, though it requires more formal registration.

Once you’ve chosen your structure, consider registering a business name, especially if it differs from your own name, to help clients recognise your brand and to meet any local legal requirements. You can then secure a Tax Identification Number (TIN) to make tax filings and to separate your personal and business finances.

2. Navigating legal and financial requirements
As an independent contractor, you’re responsible for tracking your income, expenses, and paying taxes. You’ll need to file your own taxes, including self-employment tax. A good practice is to set aside a portion of each payment you receive to cover these taxes. 

Depending on your industry, you may need specific licenses or certifications to legally operate. For example, if you’re a consultant in finance, these credentials help you meet industry standards and build trust with clients.

You should also protect yourself with insurance. But what kind of insurance does an independent contractor like you need?

There are several types of insurance you can consider protecting yourself and your business, such as: 

• Professional indemnity insurance (errors & omissions insurance): If your work involves giving advice or providing professional services, this protects you in case a client claims your work was faulty, caused them financial loss, or led to a lawsuit. 
• Workers’ compensation insurance: While you may not have employees, if you work in a field where you could get injured (like construction), this insurance can serve as your protection. It covers medical expenses and lost wages if get hurt on the job.
• Equipment insurance: If you rely on expensive tools, tech, or equipment for your work (like a photographer’s camera or a graphic designer’s computer), this insurance can cover repair or replacement costs if they get damaged, lost, or stolen.
• Income protection insurance: This is useful if you’re unable to work due to illness or injury. It can provide a portion of your income while you recover.

3. Building a client base and marketing yourself
Building a client base as an independent contractor can take time, but with the right strategies, you can attract and retain clients. You may wonder, how do I market myself as an independent contractor?

Here are some practical ways to do it: 

1. Create a strong portfolio: Your portfolio is a collection of your best work, which can showcase your skills and experience. It’s the first thing potential clients will look at and ask for, so make sure it reflects your abilities well. Whether you’re a writer, designer, consultant, or in another field, display examples that highlight what you can do.
2. Leverage networking: Networking is crucial to growing your client base. Attend industry events, join professional groups, or connect with others on LinkedIn. It’s all about building relationships that can lead to future work or referrals. A personal recommendation or introduction can go a long way in gaining trust from new clients.
3. Use social media: Social media platforms like LinkedIn, Instagram, and Twitter can help you reach potential clients. Share valuable content related to your services, engage with others in your industry, and make sure your profiles are up-to-date with relevant information about what you offer.
4. Ask for referrals: Don’t be afraid to ask satisfied clients for referrals. Word-of-mouth can be one of the most powerful tools in getting new business. Happy clients are often willing to recommend you to others if they believe in your work.
5. Stay consistent: Consistency is key to staying visible in the market. Keep engaging with potential clients, updating your portfolio, and showcasing your expertise regularly. The more you put yourself out there, the more likely clients will notice you.
6. Offer value: When reaching out to potential clients, focus on how you can help solve their problems. Make it clear that you understand their needs and show them how your skills can meet those needs better than anyone else.

Building a client base takes time and persistence, but by focusing on networking, building a solid online presence, and consistently delivering value, you’ll be able to attract and retain clients in the long term.

Related: How to succeed in contracting

4. Creating and managing contracts
Having a thorough contract or agreement with each client can set expectations, protect your rights, and prevent misunderstandings. A solid agreement should address all aspects of your gig, such as the scope of work, payment terms, confidentiality, and termination terms. 

You also have to make sure your payment terms are clear to get paid on time. Will you bill after the project, weekly or monthly? How many days does the client have to pay you after receiving the invoice? You can then charge a small fee for late payment to encourage your clients to pay on time. 

What are the key components of an independent contractor agreement?
In your agreement with your client, the scope of work, payment terms, intellectual property rights, confidentiality clauses, and termination condition should beincluded. 

5. Financial management and planning for stability
When you’re working independently, income may vary from month to month, so you have to learn how to budget properly. You can start by monitoring your cash flow—a spreadsheet or accounting software can make it easier to manage cash flow.

Record all income, project-related expenses, and any business costs. This will help you identify spending trends and areas where you might cut back if needed. By regularly tracking your cash flow, you’ll be better prepared to adjust spending or save when projects are going well.

How do I manage my finances as an independent contractor?
Income can fluctuate as a contractor, especially when projects wrap up or clients have different payment schedules. Here are some strategies to keep your finances stable despite these ups and downs:

• Build an emergency fund: A buffer of three to six months of living expenses can provide peace of mind during lean periods. Think of it as a safety net for slow seasons, client delays, or unexpected expenses. You can build this fund gradually by setting aside a portion of each payment until you reach your goal.
• Set aside for taxes: As an independent contractor, you are usually responsible for your own taxes. Avoid an unexpected tax bill by setting aside a percentage of each payment specifically for taxes—generally around 20-30%, depending on your income level. This way, tax time won’t come with any unwelcome surprises.
• Diversify your client base: Relying on a single client for income is risky. Aim to work with multiple clients or build a secondary income source, such as a side project or freelance gig. This approach can help reduce financial risk and give you more stability when one project ends or another slows down.

Overcoming the challenges of contracting

Now that you have some guidance on how to transition into contracting, let’s talk about the challenges that come along the way. 

While contracting offers a lot of flexibility, it can sometimes feel uncertain. As contractors typically work on short-term projects, it’s easy to wonder if this career path will provide stability or align with your long-term goals.

One way to manage this is by setting clear professional goals and regularly evaluating whether contracting meets those goals. Stay open to exploring different industries and skills, which can help open more opportunities and widen your client base. 

Moreover, contracting often involves more complex paperwork, including tax filings, contracts, and licenses, which can be of too much headache if you’re not well-versed with the processes. To make your life easier, consider working with an accountant or a workforce solution expert, such as CXC, to help you navigate compliance for contractors. 

Understanding the essentials—such as what types of insurance you may need and how to stay compliant with local laws—can prevent potential issues down the line.

Is contracting right for you? Final considerations

Starting a contracting career can bring both freedom and growth. However, it also requires discipline and financial management to handle the slow seasons. To put it simply, think about whether you’re comfortable with the financial and logistical demands that come with being your own boss. 

If you’re still unsure, you can talk to experienced contractors who can provide valuable insights and answer your questions. You can join CXC’s Out of Office (OOO), where you can network with contractors around the world and learn from their experience. Aside from networking, you’ll gain access to OOO’s remote job opportunities to help grow your career or kickstart your contracting journey. 

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