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How To Become An Independent Contractor

May 5, 2021
Bill Kimball

how to become an independent contractor

The IRS has specific guidelines and formulas, but it’s an easy way to take money off of your tax bill. As an independent contractor, you must act as your own administrative assistant, data-entry clerk, accountant and more. If you don’t want to work in this capacity, you may have to hire employees, increasing your costs. Although independent contractors may enjoy several benefits, they may also have challenges. Understanding these hurdles can help you navigate your contractor business. When a company struggles, it may choose to downsize or outsource its workforce to lower costs. As an independent contractor, layoffs typically won’t affect you.

  • If you’re an independent contractor, you have to pay self-employment taxes to the IRS (the current rate is 15.3%—12.4% for social security and 2.9% for Medicare).
  • This will strengthen your case and prove that you indeed are an independent contractor.
  • Seriously consider hiring an accountant at this stage so that you can create a plan that’s realistic and professional.
  • Even when it seems clear-cut, sometimes there are fine lines.
  • A freelancer is an individual who earns money on a per-job or per-task basis, usually for short-term work.

Independent also don’t get employee benefits, or protection from employment laws, like the Fair Labor Standards Act , the Occupational Safety & Health Act and Title VII of the Civil Rights Act. Remember, taxes are a key benefit of being an independent contractor. You can deduct lots of business expenses that employees can only dream about. You might even be able to create a tax loss and, as a result, lower the income tax due on your other income from your day job. Your tax person will likely ask you to make quarterly payments (if your business rakes in more than $3,000 or $4,000 a year in gross income).

Business License

Independent contractors must keep track of their earnings and include every payment received from clients. Clients are legally obliged to issue 1099-MISC forms to their contractors if the amount they paid warrants that expense. If an independent contractor earns more than $599 from a single payer, that payer is required to issue the contractor a 1099 form detailing their earnings for the year. Freelancers can reduce their gross income through the use of allowed business deductions, thus lowering their tax bill. The IRS says misclassification is a form of tax evasion, and might come after you for the unpaid employer and employee portions of Social Security, and Medicare if they discover you’ve done it. Typically an independent contractor will first send you an invoice, which will specify certain payment terms. Depending on your accounts payable process, you might also send them a purchase order back to confirm the invoice before issuing the final payment.

You can just start taking in money and paying your business bills—and keeping records of your transactions. Paying Social Security and Medicare taxes becomes your personal responsibility (it’s called self-employment tax).

Use it to track expenses, send out invoices and reduce your end-of-year tax work. Professional indemnity and public liability are usually the important ones. You won’t ‘belong’ to the organization you happen to be contracting for. They don’t have to invite you to company meetings or involve you in strategy discussions or planning. And some full-time employees may resent you if they think you’re earning more than them.

An independent contractor is anyone who does work on a contract basis to complete a particular project or assignment. Read my blog post – Tax Deduction 101 for Small Businesses – to find out what you are eligible to claim. Or get comprehensive guidance for the self employed business owner here. Great overview, but I think that you would agree that there are MANY more details to going into business for yourself. I think it is wise to set up a LLC, for the liability protection alone.

how to become an independent contractor

You are, however, responsible for managing your own payment and taxes. Also, you likely won’t have some of the protections that traditional employees receive through labor laws. An independent contractor provides goods, labor or services to another individual or organization.

As an independent contractor, you are now responsible for paying your own taxes, Social Security, unemployment taxes, workers’ compensation, health insurance, and other benefits. You will also have to enter into contractual relationships with your clients that are quite different in nature to regular employer/employee relationships and obligations. However, whether these people are independent contractors or employees depends on the facts in each case. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. As an independent contractor, you’re considered by the federal government to be both an employer and an employee. When you do your taxes, you can deduct half of this, or 7.65%, from your taxable income, but you’re still responsible for paying 15.3%.

Track Small Business Cashflow Without Spreadsheets

The Tax Cuts and Jobs Act of 2017 set up a new tax deduction for pass-through entities which allows you to deduct up to 20% of net business income earned as an additional personal deduction. Employees get paid a regular wage, have taxes withheld from those wages, work part or full-time, and have their work and schedule dictated by the employer. If you’re doing work for someone, you’re not on their payroll, and you signed a contract with them, you’re probably an independent contractor. While being an independent contractor comes with advantages over being an employee, there are drawbacks, as well.

Whenever you provide services and get paid, you must comply with several government rules, even if you work only a few hours per week. Self-employment tax is the tax that a small business owner must pay to the federal government to fund Medicare and Social Security.

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how to become an independent contractor

There are legal requirements that classify workers into employees and independent contractors. Before starting your first job , it’s important to become familiar with these distinctions. There are, after all, huge advantages to being an independent contractor. At the same time many independent contractors find themselves working even harder than they did in a full time job, without the reliability of a steady paycheck and benefits.

Pay Estimated Income And Self

For more information on determining whether you are an independent contractor or an employee, refer to the section on Independent Contractors or Employees. However, your earnings as an employee may be subject to FICA and income tax withholding. If an employer-employee relationship exists , you are not an independent contractor and your earnings are generally not subject to Self-Employment Tax.

This can be big purchases, such as a computer or a vehicle, to something smaller, such as paper and staples. Continuing education courses, training classes and university schooling are all tax-deductible expenses. If you buy your clients gifts or entertain them for business purposes, you can deduct a portion of these expenses. If you drive to clients to perform your services, keep a log of your mileage. You should avoid credit card debt at all costs, but if you accrue some during the year, you can deduct this interest from your taxable income to lower your overall tax bill. Even sole proprietors should keep business expenses separate from personal expenses.

Your client doesn’t have to provide you with health benefits or even pay you the minimum wage. But some people are able to do high-value work in a short space of time. Even taking into account loss of holiday pay, sick pay and other benefits, such workers can still come out ahead financially as contractors. ontractors often start as employees first, before leaving to work on their own. They have a good knowledge of the rates being paid and the type of work expected of them. If you’re not sure what you can charge, have a look at sites such asUpwork for rates and other information.

The IRS won’t allow you to wait until the end of the year to pay these taxes, so you must make quarterly estimated tax payments. Your business name and address can also be used to apply for an Employer ID Number for your business. The Employer ID is necessary for most types of businesses, even if they don’t have employees. You can use your business entity to purchase insurance and take the deductions for this expense, again minimizing your tax bill.

It’s best that all workers, especially those considering independent contract work, understand the pros and cons of this classification. If you’re the adventurous, entrepreneurial type, then working as an independent contractor might be a great career choice for you.

For example, Carolyn Smith Medical Writing would not need to be registered. But if your business does not use your full name, you must register it as a fictitious (or “assumed”) name. The more well-known term in most states is DBA, or “doing business as.” You can the name registered at a county clerk’s office or a state-level office. If a name similar to your desired name is already in use, it may still be usable. However, your business itself would have to be substantially different from the existing one, such as in location or the service it offers. Your state filing office if your business is a corporation, LLC, or limited partnership. Choosing a business structure may require the help of an advisor, as there are intricacies and advantages to each one that are not always apparent on the surface.

Lack Of A Steady Paycheck

HINT – If you go this route, select the cheapest alternative. Pick a name that describes what you do and who you do it for. Print up invoices and business cards with your business name rather than your own personal name. But with the right skills and attitude, being a self-employed contractor can be liberating and empowering. It’s likely you’ll have more freedom than you ever had in your previous working life. And with the cloud-based software applications available today, becoming a contractor is easier now than ever. Whether it’s creating and maintaining your website or managing your social media presence, there are apps available to help you publicize your contractor business.

Fortunately, you can avoid tax issues at the end of the year by following a few simple tips. When your business grows, you may need reliable employees to help you get things done. Finding dependable, skilled employees isn’t easy, especially if you don’t have an attractive benefits package. Earning enough money to pay employees an appealing wage can often take years to achieve. There are many benefits to working for yourself in this way.

how to become an independent contractor

This is a critical step that many new independent contractors miss. You must separate your personal money from your business money. If you are self-employed and someone sues you, and your money isn’t kept separately, then everything you have can be pulled into the lawsuit.

A self-employed individual does not work for a specific employer who pays them a consistent salary or wage. The cons of being an independent contractor are related to the risk involved. They aren’t supported by a regular salary when business is bad. They are responsible for all business costs—no reimbursable expense reports for them—and if working alone, they lack the support and camaraderie of coworkers.