As a contract worker, there are some things you may not have had to consider previously, but that needs to be addressed.
Scope of Work Agreement (SWA)
One of the most important documents for contract workers is a Scope of Work Agreement (SWA). This written agreement outlines the details of the arrangement between the contract worker and the employer. The agreement should state that the arrangement is one between an independent contractor and the contracting company. The contract should also specify — in writing — what the specific responsibilities and deliverables are, including deadlines. The SWA may also outline the specific timeframe for the contract arrangement. It should also detail the amounts and timing of payments, including when payments are due, and what happens if payments are not made. Finally, it should clarify ownership of the work being performed. Does the contract worker or the hiring company own the work? Both parties should sign and retain copies of the SWA.
If the contract worker is functioning as a self-employed individual, there are several types of insurance to consider. In addition to health insurance, the contract worker may be required to show proof of liability coverage. In addition, if possible, the contract worker should obtain short-term and/or long-term disability coverage, although that may be difficult to secure and/or costly, depending on the type of work being performed.
For health insurance, consider procuring health insurance through the Affordable Care Act Marketplace at https://www.healthcare.gov. If you have recently lost your insurance coverage from a traditional employer, you may be eligible for a Special Enrollment Period outside of the annual open enrollment dates. Also consider short-term health insurance plans, which provide more limited coverage but at a lower cost. These plans are available for terms of up to 12 months (renewable up to 36 months, depending on the state of residence).
Liability policies may be available through your regular insurance agent or specialized agencies, such as Hiscox. In addition, some Employer of Record agencies offer liability insurance coverage.
One of the disadvantages to contract work is a lack of benefits — in particular, retirement and health insurance. In the same way that you should secure your own health insurance, you should fund your own retirement plan. One option is to open a Roth IRA, an individual retirement account that allows you to set aside money for your retirement that can be withdrawn tax-free, provided certain conditions are satisfied. The money invested within the Roth IRA grows tax-free. Contributions can be made at any age, as long as the account holder has earned income.
You do have to meet income requirements to contribute to a Roth IRA. In 2020, the income limit for singles is $139,000; for married couples, the limit is $206,000. The amount you can contribute to a Roth IRA also changes periodically. In 2020, the contribution limit is $6,000 a year for individuals up to age 50; those 50 and older can contribute $7,000. Almost all brokerage firms, banks, and investment companies offer a Roth IRA. Consult a financial advisor for specific information.
One of the biggest differences between permanent employment and contract employment is taxes. If you are employed through a staffing agency or Employer of Record, that organization may assist with tax compliance. If, however, you are self-employed, you are responsible for withholding and submitting your own taxes, including quarterly estimated taxes. You should consult with a qualified tax advisor to ensure you are setting aside and remitting the correct amounts to both the state and federal government.
The Future of Contract Work
Contract work is expected to continue to grow in the coming years, especially as remote work opportunities become more available. Technology increases the opportunities to not only perform job responsibilities but also find contract opportunities and handle the billing and paperwork associated with working independently.
Contract work is especially appealing to skilled professionals, aging baby boomers who are looking for more control over their time in their pre-retirement years, and millennials, who like the flexibility of contract work.
Employers also find a contract work arrangement to be beneficial, giving them access to skilled workers who want more control over their time and income. And because contract workers can be employed on an as-needed basis, it gives employers the flexibility to respond to changing economic situations.
The future of work is likely to be more fluid. Instead of a series of long-term, permanent positions, workers may find themselves shifting between independent work and traditional employment. Some industries, such as the film industry, have provided a model for the team- and project-oriented work for many years. Research suggests this is likely to become more common in other industries, such as information technology, healthcare, and government services.
So whether you’re considering contract work as a bridge between permanent positions or a new way of working, you’re part of a trend in the workforce.