What you need to know about becoming an independent contractor legally

According to the IRS, someone self-employed should be treated as independent contractors if they are in business for themselves.

İpek Tüzün
İpek Tüzün

Are you an Independent contractor?

According to the IRS, someone self-employed should be treated as independent contractors if they are in business for themselves. In other words, someone who is self-employed typically follows their own set of rules and sets their hours. Independent contractors set their hours and have more control over their daily operations. Many people don't understand the difference between an independent contractor and an employee.

The big question: Am I an independent contractor? There are many factors the IRS uses to decide which classification to give. The difference between the two can be pretty significant. In general, a worker is an employee if the payer has the right to control both what will be done and how it will be done. The general rule is that a worker is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. A small tip, you'll know if you're being treated as an independent contractor instead of an employee if you are not asked to complete an IRS Form W-4. Of course, the earnings of a person working as an independent contractor are subject to Self-Employment Tax. Before you continue, make sure you know all the difference and how to be a contractor?

How to become an Independent Contractor Legally? Consider these 7 requirements

Being an independent contractor is an excellent way for people to have their careers, earn extra income, or start their own business. If you are thinking of starting your own independent contracting business, it’s essential to know where to begin.

If you have been asking yourself the question ‘how to become for a way to become an independent contractor?’, you are in luck. Here are the steps you will need to take to be an independent contractor legally.

Pick a business name

Picking a name is the most critical step in starting your own business. You can't run a business without a name. Naming your business is not like naming your baby. Although the choices are difficult, choosing a name for your business is an integral part of growing your company. Therefore, you should spend some time picking a memorable name that describes what you do or the image that you want to project.

Your name is important, but it's not as simple as just picking one. There are several things you should know about choosing your company name. The first name, or single word name, you choose for your business should essentially encompass the entire company itself. The name should be short and to the point because your clients will be looking for that name while conducting a web search or passing by other companies with similar names.

Be sure to reserve your business name before spending a lot of money using stationery or business cards that feature the name. Your business name should be available as long as it is legal and no one else has it. Most states require that you register your name before you advertise or open for business. You can get more information about your options on the SBA website.

Get a tax registration

A tax registration certificate shows the local tax collector that you are registered with the state and paid your taxes. Obtaining a form for this certificate from your city or county will usually be one of the first steps in beginning a business after applying for and receiving a Tax ID number from the state. The exact procedure can vary widely across states, and there is little consistency in how businesses are classified for tax purposes.

A tax registration certificate shows that your business pays taxes to the city, county, or state, and it usually lists the location of your business. Many cities and counties use this information to create databases and mailing lists based on where a company is located. It is not required that you have a physical address for your home-based business as long as it's registered at an address within the city limits. Obtaining a tax registration certificate helps your business be legitimate, and you should contact your city clerk for an application.

Register for a business license

Like most business owners, an independent contractor needs a business license to operate her business legally. A business license is a government-issued permit some cities and counties require for businesses to operate within their boundaries. In most cases, business licenses are needed to ensure that these companies obtain proper permits, pay city taxes, and follow any local rules imposed on similar types of businesses. Business licenses are often referred to as permits or certificates because they grant permission to do business.

In some areas in the US, you do not have to have a business license. Do you need to obtain a business license for your independent contractor work? It is a good idea to first find out about business license requirements where you live. Here we have listed some useful links that you can learn more about the registration process of your business state by state.


State

Resource URLs

Alabama

Alabama Revenue Website: Licensing

Alaska

Alaska Commerce Department: Licensing

Arizona

AZcommerce.com

Arkansas

Arkansas.gov: Professional Licensing

California

CalGold

Colorado

Colorado Occupational License Database

Connecticut

CT’s Business Response Center

Delaware

Delaware One Stop Business Registration & Licensing

Florida

Florida Department of Business and Professional Regulation

Georgia

Georgia Start a Small Business

Hawaii

Hawai’i Professional and Vocational Licensing

Idaho

Idaho Biz Help

Illinois

Illinois.gov: Registration, Licenses, & Permits

Indiana

In.Biz

Iowa

Iowa Source Link

Kansas

Kansas Department of Revenue: Registering a Business

Kentucky

Kentucky One-Stop Business Portal

Louisiana

GeauxBiz

Maine

Maine.gov: Business Licensing

Maryland

Maryland OneStop

Massachusetts

Mass.gov: Professional Licenses & Permits

Michigan

Michigan State License Search

Minnesota

License Minnesota

Mississippi

Mississippi Small Business Development Center

Missouri

Missouri Secretary of State

Montana

Montana eStop Business Licenses

Nebraska

Nebraska.gov: Business Licensing

Nevada

Nevada Secretary of State

New Hampshire

New Hampshire Business One Stop

New Jersey

New Jersey Business Portal

New Mexico

New Mexico Regulation & Licensing Department

New York

New York State: Business Wizard

North Carolina

North Carolina Department of Commerce

North Dakota

NDSU

Ohio

Ohio.gov: Starting a Business

Oklahoma

Oklahoma Dept of Commerce: Business Licensing & Operating Requirements

Oregon

LicenseInfo.Oregon.gov

Pennsylvania

PA Biz Online

Rhode Island

Rhode Island Dept of Business Regulation

South Carolina

South Carolina Business One Stop

South Dakota

South Dakota Department of Revenue

Tennessee

Tennessee Department of Revenue

Texas

Texas Business Licenses and Permits Guide

Utah

Utah One Stop Online Business Registration

Vermont

Vermont Department of Taxes

Virginia

Virginia Business One Stop

Washington

Washington DOL: Business & Professional Licenses

West Virginia

West Virginia One Stop Business Portal

Wisconsin

Wisconsin Dept. of Safety and Professional Services: License/Permit/Registration

Wyoming

Wyoming Business Permit Booklet

Understand the importance of NDAs

A non-Disclosure Agreement or NDA is a legal document stating that parties that have transmitted some sensitive information, such as business ventures, may not divulge the contents to a third party without permission from the person who gave them the information in the first place. It's essential to understand how they work and why they are crucial to start your own business.

A non-disclosure agreement (NDA) is a legal document that prohibits discussions of specific information or elements of an agreement from being shared to third parties. In the startup world and freelancing ecosystem, NDAs are essential for protecting the intellectual property rights of companies or individuals before sharing sensitive information with others.

NDAs are commonly used in business negotiations but can be helpful in many other situations as well. They guide the parties in what is acceptable to disclose and explain the consequences of violating the terms. In addition, NDA defines the ownership rights over ideas discussed during a negotiation. If you are a solopreneur and want to secure your work and payment, you can easily create contract agreements with Rimuut.

Keep records of expenses for tax purposes

If you are an independent contractor, you should keep records of your business transactions. The Internal Revenue Service (IRS) requires you to keep business records so that you can report your business income and expenses and pay any necessary taxes. Without good records, you will have difficulty proving income, deductions, credits, and employment status for yourself or your employees. There are several business recordkeeping systems available.

Failure to keep records that match your financial report can lead to errors in the IRS record, which may result in penalties or fines from the tax authority. Therefore, it is significant to have all the records ready if ever requested by the tax inspector or revenue officers. Your gross income documents will vary concerning the type of business you have. All papers should be kept for at least three years from the date they're prepared unless the law states otherwise. Here are some types of documents you should keep:

  • Receipts
  • Purchases
  • Expenses
  • Assets
  • Employment Taxes

Also, here is the list of deductible expenses.

Consider what you can deduct from your expenses

Nearly all of your business expenses can be fully deducted in the year you incur them. However, many of the more significant deductions (like advertising expenses and home office costs) have to follow a complex set of easier rules to understand after you know what's deductible and what's not - and where the saving opportunities are.

Deducting these expenses can significantly reduce your taxable business income and help you avoid paying a lot in taxes. But what expenses are fully deductible? How do you know if you can write off a purchase? Is there anything you can't deduct? Here is the list of the expenses that you can deduct.

Pay income tax, insurance, and social security

As an independent contractor, you must file your income tax return and pay your own taxes. On the plus side, since you’re self-employed, you can deduct business expenses from your taxable income. If you run your freelance business as a sole proprietorship, partnership, limited liability company (LLC), or corporation, you are considered self-employed. Businesses that pay you for services you provided as an independent contractor are accountable for making estimated tax payments on your behalf. Here’s what you need to know about paying taxes as an independent contractor.

If you are an independent contractor, you may need to file a personal income tax return with the Internal Revenue Service (IRS). You must file and pay taxes if your net self-employment earnings are $400 or more. If you’re self-employed, the federal government considers you to be a business on its own. To determine how much of your income is taxable, you need to file a Schedule C along with your federal tax return (Form 1040). Schedule C is used to calculate your net earnings or losses from self-employment.

When you work as an independent contractor, you will pay your income taxes and self-employment taxes. Taxes that you pay for the income of a sole proprietorship business are usually referred to as Schedule C taxes.

Independent contractors are considered self-employed in the IRS system. The law sets the self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes. Generally, you must pay freelance tax if you have earned $400 net or more from self-employment. In addition to this, you must consider insurance costs. The average cost of general liability insurance for independent contractors is $29 per month or $344 per year.

To get more information check out more information on independent contractor taxes in the US.

FAQ about Becoming an Independent Contractor

Is contract work considered self-employed?

Independent contractors are considered self-employed freelancers, so they're responsible for their taxes.

Can a company be an independent contractor?

Contractors are typically defined as individuals or businesses that are hired based on a written agreement and not directly employed by a particular organization.

How much money should I set aside for taxes as an independent contractor?

If you’re an independent contractor or freelancer, you should plan on setting aside about 25% to 30% of your income for taxes.

Can you tell an independent contractor when to work?

There are many misconceptions about independent contractors. One of these is that they can be told when to work. By definition, independent contractors can dictate their schedules.

Can an independent contractor have employees?

If you hire a new worker as an independent contractor and that person should be an employee, your business might have to pay fines and penalties.

How many hours can an independent contractor work?

The answers aren't always cut and dried, which is why it's good to understand the laws that govern independent contractors. The answer to this question is simple - the contractor can work as many hours as they agree to with the client.  If the contractor works more than 40 hours a week, that is the contractor's decision.

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İpek Tüzün

İpek Tüzün is a human being, digital marketing person, writer, researcher on the future of work, and sci-fi fan based on earth.