The Independent Contractor’s Survival Guide

A trip to the fax machine changed Charmaine Davis’ life. At the time, she was working as an information technology consultant for a major Washington, D.C., consulting firm. She noticed a sheet of paper that revealed the company was charging clients $90 an hour for her services. Based on the firm’s rate, Davis calculated that if she worked a traditional 40-hour work week, her earnings totaled more than $187,000 a year. “I was making $50,000, which isn’t bad in D.C.,” she says, “but when I saw the fax I realized they were keeping most of the money they were making off of me.”

Even before discovering her worth as an information technology consultant, Davis, 43, was already considering working for herself. She was frustrated with the lack of input on assignments and the direction of her career. These frustrations led her to become an independent contractor in 1992, working as an information technology consultant for companies such as Computer Sciences Corp. and TRW and earning $100,000 to $150,000 a year.

Davis may work independently, but she is not alone. A tight labor market has pushed many American workers to enter the risky business of independent contracting. Although accountants, consultants, writers, hair stylists, psychotherapists, and other professionals who work as independent contractors have the freedom of being their own boss, it takes a lot of planning and hard work to stay financially afloat. A survey conducted by the National Association for the Self-Employed found that 49% of respondents don’t have health insurance because they can’t afford the premiums.

Finding affordable health insurance is just one challenge. Independent contractors must deal with issues that people in traditional jobs often don’t handle entirely on their own, such as retirement and tax planning, obtaining adequate insurance coverage and tracking business expenses — all while juggling work and generating new business leads.

“My primary fear was that I wouldn’t be able to stay employed consistently, but that turned out not to be a problem,” says Davis, who is currently parlaying her interest in fitness into a new career as a personal trainer. “The information technology industry was booming during the height of my consulting, so whenever a contract was coming to an end, I simply posted my resumé on two or three Internet job sites and received as many as five calls a day.”

Sometimes Davis works for several employers. At least three companies allow her to invest pre-tax income in their retirement plans by classifying her as a W-2 hourly employee, and she can add to the plans each time she has an assignment with the company, which deducts income taxes from her wages. She puts after-tax income in Individual Retirement Accounts and mutual funds and says she’s saved about $78,000 toward retirement.

Davis has worked between contracts for as long as two months so she was advised by her sister, an accountant, to keep five months worth of expenses on hand. Some of those costs include $225 a month for an Aetna health insurance plan for self-employed individuals that