Being an independent contractor is a quite popular profession that most youngsters prefer nowadays. Whether providing electric work as an electrician or serving patients as a dentist, people are more attracted to this working style. This occupation offers flexibility and high control over the career path.
According to Statista, the number of independent contractors in the USA increased significantly from 15.8 million to 36.6 million from 2020 to 2023.
However, at the outset of this job, you must have a clear understanding of how to become an independent contractor. We are sharing our words to introduce you to the answer to this question.
What Is an Independent Contractor?
An independent contractor professional helps businesses or individuals by providing labor, goods, or services while charging a certain amount in return. They act as a third party to the business, but such professionals do not receive the same benefits as employees during their employment.
An independent contractor always works as an individual entity. Professionals can set their own hours, rates, and availability.
Independent Contractors Examples
Following are the examples of independent contractors:
- Electrician
- Plumber
- House Painter
- Carpenters
- Construction Workers
- Graphic Designers
- Photographer
- Auto Mechanics
- Dentist
- Lawyers
- Auctioneers
- Subcontractors
- Accountants
How to Become an Independent Contractor? Steps to Your Dream Business
1. Figure Out Your Business Structure
When you think about how to become a private contractor, the first step is to identify the business structure. However, initially, you are the sole proprietor when you work as a contractor.
In this scenario, no legal distinction exists between you and your business entity. Later on, as you grow, you can follow the business structures listed below.
One-Person Limited Liability Companies (LLC): As you are the only owner of your business, you must separate your personal assets and business assets from each other. So, it is better to handle business tax and personal tax separately.
Partnership: When you provide professional services like accounting, law, dentistry, or dentistry. A partnership agreement refers to the sharing of losses, profits, and taxes.
Incorporation: This applies when you intend to hire employees or sell products. Incorporation may require choosing a board of directors.
2. Pick a Business Name and Register It
You have chosen the business structure—that’s great! You have passed the first stage. Now, it’s time to give your business a unique name, which is another brainstorming task.
Giving a business name is crucial when becoming an independent contractor and starting a business.
This name differentiates your business from your competitors on the market. You must focus on a few points while naming your business:
- The name should be unlikely to change in the future
- The name should be simple to remember
- Keep the name simple
- The name should be unique and not used earlier by any professional
If your business name doesn’t include a full legal name, register it with a fictitious business name. This registration will restrict other businesses from using your name for their purpose.
3. Acquire Tax Registration Certificate
Getting a tax registration certificate is essential when you become an independent contractor. Once you register for tax purposes, you will get a tax registration certificate. Businesses need to perform registration as per the rules of the local tax collector.
This tax registration certificate (also known as a business license) acts as a receipt while you pay taxes. This certificate is essential when you operate your business in another city. The lack of this certificate can give rise to penalties and fines.
4. Get a Professional or Vocational License
A professional or vocational license is a crucial element on the list of independent contractor requirements. It helps your business operate legally.
This licensing is important for real estate agents, auto mechanics, hair stylists, and electricians. However, freelance writers and graphic designers do not require licenses to run their businesses.
The requirements for an independent contractor license can be federal or state licensing. A federal license is required when a federal agency regulates the business, but a state license depends upon the state in which you are operating your business.
Some licenses are valid for a certain period. Therefore, it is crucial to be aware of the validity period and renew your license accordingly.
5. Separate Business Bank Account
As you work as an individual entity, it is necessary to have a separate business checking account. This makes financial management simple and handy. Also, there will be fewer chances of confusion, as everything will be in a clear frame.
It also helps you with paying taxes because your business income and expenditures are in one separate account. An individual business bank account is also helpful for easy access to business loans and credit cards. So, always have a separate business bank account when working as a contractor.
6. Gear Up to Receive Payments
When your business bank account is ready to operate, you are ready to get your payments. To receive payment for your hard work, you will need to create an invoice from invoicing software like Moon Invoice and share it with your client.
Key reasons to choose Moon Invoice
- 66+ custom templates for invoice
- 100+ currencies support
- 15+ payment gateway integrations
- Professional templates to enhance your business brand
- Automatically calculate your total amount
- Auto-tax calculation
- Handy to download and take a print of the invoice
- Checking the activity log
- Signature request
- Make duplicate copies of the invoice
- PDF and print setting
- Easy invoice sharing via WhatsApp or email
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How Does an Independent Contractor Handle Tax Payments?
Tax-paying is a crucial and complicated process in business. However, understanding it is crucial when you are becoming an independent contractor. Here are some taxes you must understand well.
Understanding Self-Employment Taxes
An independent contractor must pay federal self-employment taxes (which cover Medicare and Social Security Taxes). The self-employment rate for Social Security is 12.4% to 15.3% on $160,200, and for Medicare, it is 2.9%.
Quarterly Estimated Tax Payments
Independent contractors make estimated tax payments to the IRS quarterly when they owe $1,000 or more during the tax return filing.
Form 1040-ES is useful for calculating and paying estimated taxes. Independent workers can easily determine the amount to pay each quarter based on taxable income, gross income, and deductions.
Annual Tax Return Filing
Schedule C is useful for independent contractors to report their income and expenses. It is also filed with the personal tax return (Form 1040), which helps determine their net income.
Additionally, it is handy to deduct business expenses like suppliers, home office expenses, and traveling. This helps to cut down on taxable income and tax bills through tax credits.
How Independent Contractors and Employees are Different?
There are many points that differentiate independent contractors from employees. Here is a tabular structure of independent contractors vs employees:
| Independent Contractor | Employee |
|---|---|
| An independent contractor works independently, and working hours can fluctuate. | An employee works for a fixed time period, and there is no independent working. |
| When an individual works as a contractor, he generally has no legal contracts with the business. | An employee might have a legal contract with the business or employer. |
| The payment and earnings are generally in the form of an hourly rate. An independent contractor decides on this rate. | The earnings of an employee are in the form of a salary, which is fixed for the month. Sometimes, they have hourly wages, but employers decide the amount. |
| Employers who hire independent contractors offer only instructions or other crucial information about the company. | Employees are often given training and introduced to company policies, which they are bound by. |
| The working contract is generally short-term. | Employees always bind themselves to the company for the long term. |
Pros and Cons of Independent Contractor Working
Being an independent contractor comes with both benefits and challenges, which we outline here.
Pros
Offer Flexibility
One of the top benefits of being an independent contractor is flexible working hours. You have the freedom to define your working schedule at your convenience. This is not available in full-time employment.
Work-Life Balance
As you work as an independent contractor, there is a greater possibility of a better work-life balance. You can perform your other crucial work or enjoy your time with family and friends at your convenience.
Full Financial Control
As the owner of your business, you have the full right to take all the profits. You can decide the amount of money you want to invest in the business.
Tax Deductions
When working as an independent contractor, it is easy to claim a deduction on federal income tax for business expenses.
High Paying Career
An independent contractor is a high-paying career. One can set high prices by gaining deep knowledge of work, experience, and proficiency.
Cons
Lack of Employee Benefits
Companies provide various benefits for their employees, but independent contractors do not receive such benefits. This is the major disadvantage of working independently.
Income Variation
Independent workers often face variation in their income from month to month. However, this scenario is at the beginning. Once you set up a stable business, there is consistent income that is satisfactory.
Liable for Self-Employment Tax
Independent contractors are responsible for paying both self-employment and income taxes. It covers Social Security and Medicare taxes.
High Responsibility
You will be solely responsible when the business goes into bad condition. Still, as the solely responsible person and owner of the business, you can predict issues and fix them.
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Last Remarks
Choosing an independent worker is a good decision when you prioritize work flexibility and a high income. This profession provides your work-life balance at an optimal level and enables you to have full financial control. However, you must be dedicated, keep yourself updated with the latest market trends, and adopt a smart invoicing process.
The steps outlined above provide the answer to the question of how to become an independent contractor. So, are you dreaming of this profession? Follow the above strategy wisely.
Frequently Asked Questions
Jayanti Katariya is the founder & CEO of Moon Invoice, with over a decade of experience in developing SaaS products and the fintech industry. He holds a degree in engineering. Since 2011, Jayanti's expertise has helped thousands of businesses, from small startups to large enterprises, streamline invoicing, estimation, and accounting operations. His vision is to deliver top-tier financial solutions globally, ensuring efficient financial management for all business owners.
