How to Become an Independent Contractor in 5 Steps

Why become self-employed?

There’s a lot of reasons why people love being self-employed. First and foremost, they get to be their own boss, which means no more office politics, no more worrying about job security, and no more having others control their work and livelihood. 

As a result, independent contractors tend to enjoy a much better work-life balance. 

Furthermore, when you work in an organization your achievements can sometimes go unnoticed or unrewarded, but when you’re self-employed, there is a direct benefit to going the extra mile or taking on extra work. 

Based on a study about the well-being and job content of self-employed and employed professionals, it was shown that those who are self-employed are more engaged in their work and enjoy more freedom to innovate. Perhaps that is why those who get to be their own boss are usually happier with their overall work-lives. 

Another great benefit of becoming an independent contractor is more often than not, you have more control over your earning potentials. You can often set your own prices or hours, which is why freelancers and independent contracts tend to earn more than their fully-employed counterparts. 

If you work on gig apps, you have full control over which tasks to take on while getting an estimate of how much you can earn with each job. Many gig workers will work on multiple apps at once to diversify their income and make more money. This also gives you a good opportunity to learn which gig apps you prefer and fit your lifestyle the best. 

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Step four: stay on top of taxes

As an independent worker, tax season will look different than it typically would if you were a traditional employee. As an employee, a portion of your paycheck is withheld by your employer to cover income taxes as well as taxes for Medicare and Social Security. When you work as an independent contractor, however, you’re in charge of managing those taxes yourself. To help you navigate how to pay taxes as an independent contractor, you may want to consider hiring a tax accountant to manage this aspect of the business or take responsibility for the research and financial management yourself. 

Here’s what you’ll want to keep in mind when filing and paying taxes as an independent worker:

  • Whether your business structure operates as a sole proprietorship, an LLC, or an S corporation will affect how your taxes are filed and what kind of tax savings you may or may not be eligible for. 
  • It may be a wise choice to look ahead at your financial projections and make a tax estimation so that you have a general idea of how much you’ll owe at the end of the year. This way, you can even chip away at your anticipated tax expenses by making quarterly payments in January, April, June, and September rather than paying one lump sum at the end of the year. 
  • Another idea is to set up a separate bank account, a secure space in which you can set aside 20 to 25 percent of your paychecks as they come in to allot for taxes. 
  • Be sure to save receipts for things such as business travel and accommodations, rental fees for your office space, gas expenditures, business insurance premiums, advertising fees, and internet and phone bills. Keeping a careful record of these expenses could give you a break on your taxes when it comes time to file.
  • In addition to submitting Form 1040, a tax document required of both employees and independent contractors alike, you’ll need to complete a Schedule C and a Schedule SE. This is where you’ll outline your income and expenses as a contractor as well as calculate the amount of money you’ll owe for the self-employment tax. 

Before getting your independent contractor business off the ground, prioritize having a clear understanding of the standard tax procedure. This will help you to avoid unexpected financial challenges in your first year in business. 

How Do You Become an Independent Contractor?

You can become an independent contractor by working for yourself. Many freelancers in a gig-centric economy transition are independent contractors who work on a contractual basis to provide goods or services. Independent contractors may have a registered legal business name, earned any necessary certifications or licenses, and pay their estimated taxes quarterly to the IRS.

Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in coming up with the determination.

Independent contractor tax forms

In this section, we go over the tax forms contractors must fill out throughout each tax year:

  • Form W-9
  • W-8BEN
  • 1099-NEC
  • Form 1040

Form W-9: Share your Social Security or tax identification number with your client

If the client intends to pay the contractor $600 or more in a year, they must provide the contractor with form W-9 to fill out and return before business commences. The contractor must complete the W-9 form by entering their name, address, and Social Security number or tax identification number and return it to the client. The client will then retain this form for four years should any questions arise from the IRS.The Form W-9 acts as an agreement that the contractor is responsible for withholding taxes from their income. The client also uses the information on the W-9 to complete a 1099-NEC form at the end of the tax year. We explain what the 1099-MISC form is later in this article.

Form W-8BEN (or W-8BEN-E): verify your country of residence (non-US)

Contractors who lack US citizenship or residency but have worked in the US or earned income in the US must complete form W-8BEN before they receive their first payment from a US client. A W-8BEN form is a tax document used to certify that your country of residence is outside of the United States for tax purposes.If you’re a resident of a foreign country with whom the United States has an income tax treaty, submitting a Form W-8BEN may reduce your tax or exempt you from paying US tax altogether. The contractor must download and complete Form W8-BEN by filling in their:

  • Full name
  • Street address
  • Country of residence
  • Tax number
  • Date of birth
  • Article number (US tax treaty information)
  • Withholding rate

Finally, the contractor should sign and date the form and return it to the client, where it will remain on file and valid for the remainder of the year and for three full calendar years after that.

Form 1099-NEC: Report your wages to the IRS

Form 1099-NEC is a way for clients to report the contractor’s income to the IRS.If a contractor receives $600 or more from their client in a tax year, they can expect to receive a 1099-NEC form from their client.The contractor must complete the form by providing the following information:

  • The clients’ information (name and address)
  • The contractor’s information (Name, address, and taxpayer ID)
  • The total amount of compensation paid during the year
  • Any federal income tax withheld
  • Any state tax withheld
  • The total state income to the contractor for the year

The contractor must return this form to the client so they can file it with the IRS by January 31 each year. If a contractor does not receive the 1099-NEC form by the end of January, they should request it from the client directly.

Form 1040: File a return for your self-employment income

The IRS Form 1040 is one of the official documents that US taxpayers use to calculate and file their taxable income by the April tax deadline.Before contractors file a return for their self-employment income, they must first determine if they made a profit of over $400. Contractors only need to file a return for self-employment income if their net earnings (revenue minus expenses) from the business exceed $400. If your net earnings are under $400, you still need to file an income tax return if you have other earnings, such as employment income.Contractors can calculate their business’s net income or loss on the Schedule C of their Form 1040.Regarding self-employment tax, you’ll use Schedule SE on Form 1040 to calculate how much you owe based on the self-employment income.

5 tactics to find clients as an independent contractor

Growing a solid client base is essential for job security and avoiding gaps in your income when a project or contract ends. In an ideal world, you want to be turning down work because your schedule is too full.

1. Dedicate time out of your week to marketing your service and seeking new clients

The amount of time you devote to promoting your services and identifying new potential clients depends on the volume and type of work you want to do. However, a simple approach is to set aside a few hours per week to:

  • Obtain testimonials
  • Follow-up with referrals
  • Update a business website, or blog
  • Develop a prospecting list
  • Send out cold emails and pitches to prospective clients
  • Be active on social media

2. Create a profile on websites like Upwork and Fiverr

While we recommend all contractors eventually develop a polished and professional website, you shouldn’t let this hold you back from getting started. While you’re still setting up as a contractor, take advantage of websites like Upwork and Fiverr. These platforms act as a marketplace to help contractors find projects, communicate with clients, and get paid. While the pay might not be that high, and you will need to give a cut to the service provider, these platforms are still a good way for connecting with clients and building your portfolio.

3. Use competing freelancers as a ballpark for your pricing

Knowing your position in the market, your direct competitors, and your perceived value will help you price your services competitively without impacting your margins.Contractors often set pricing for each client depending on the scope of the request. While prices may vary, it’s essential to have a base rate. A base rate ensures you earn enough money on each contract to cover your basic expenses and related business costs. When setting a base rate, account for:

  • Desired annual wage
  • Internet costs
  • Marketing costs
  • Office supplies
  • Rent
  • Utilities
  • Taxes
  • Any other administrative expenses

As you gain experience and build your portfolio, raise your base rate accordingly.

4. Carve out a niche to attract higher-paying clients

It’s a good idea to refine your service offerings gradually. The most successful businesses typically provide specific services.Most contractors start their career as generalists because they haven’t yet discovered their niche, and that’s perfectly fine. However, as you gain more experience, you may see a pattern emerge or find that you lean toward a particular type of project or client. That’s working within a niche. A niche helps establish credibility and sets you apart from your competitors. Clients are typically happy to pay a higher price for a service that speaks directly to their unique problem instead of a cheaper service that provides a somewhat applicable solution. For instance, a freelance copywriter earns $29.59 per hour on average in the US. In comparison, a freelance medical copywriter makes $39 per hour on average in the US.

5. Build and leverage your network

Building a network of contractors in your field will provide you with a group of trusted industry peers to call on if you need any insights, inspiration, or assistance with a problem or query. Contractors with strong networks also benefit from referrals to new roles and projects to help you generate a steady flow of work.

Get a Tax Registration Certificate

Many cities and counties require every business — even single-owner, home-based operations — to register with the local tax collector and obtain a tax registration certificate. This certificate is sometimes called a business license, but it is essentially a receipt for the tax you must pay for the privilege of doing business in a city, and nothing more.

If you operate your business out of your home, you usually need to get a tax registration certificate in the city where you live, even if none of your clients are in that city. Contact your city clerk for an application.

Skipping This Requirement

Some independent contractors fail to register, figuring they can stay under the local government’s radar. But consider this: Tax registration certificates are inexpensive, while the penalties for operating without a license can be hundreds of dollars. In addition, in some locales it is a misdemeanor to violate city ordinances by operating without a tax registration certificate.

Get Registered

In most instances, American contractors can register their original business name with the county clerk, though some states require them to register with a state office instead. It’s important to do your research to understand what the requirements are where you live. 

Most contractors can continue paying federal taxes using their social security number on their tax filings but will need to register for an Employer Identification Number (EIN) with the IRS if you wish to hire staff in the future. Some banks may also require independent contractors to register for an EIN to open a business bank account, even if they don’t actually hire staff. 

Most gig workers and freelancers fall under the sole proprietor designation, which also allows them to file their personal income and business taxes together as a single entity, rather than filing for both independently.  

Employment Tax Guidelines

There are specific employment tax guidelines that must be followed for certain industries.

Get your business licenses and certificates

Every business needs at least one license to operate. Some will need more. Licenses are purchased at the federal, state, or local levels. They are based on your business activity, your location, and other factors such as business form and number of employees. Also, regulations vary widely among the federal, state, and local levels.

Business license

A business license is a license to conduct business within a certain area. It is typically issued by your local government. Business licenses vary greatly among localities, states, and nations.

Tax registration

You must get an employer identification number (also called an employer tax ID) if you will have employees or if you are a corporation or partnership. You can get this from the IRS.

At the state or local level, you may need a tax identification number or license. This may also be called a tax registration certificate or, sometimes, a business license.

Vocational license

Some trades require a vocational license in order to work. For example, furnace installers and barbers need to be licensed before they can offer services. This license can go by different names in different areas, such as professional license or business license.

Local permits

A variety of other permits may be needed. There may be zoning permits, building permits, health permits, occupational permits (for home-based businesses), signage permits, and alarm permits, among many others. They will differ according to local regulations.

You can be fined heavily for not being properly licensed or permitted. It should be noted that sole proprietorships may be exempt from some licensing.

All of these licenses and permits may sound overwhelming. The Small Business Administration provides a good starting point for learning about them here.

As Your Business Grows

After completing the three basic steps described above, you may start providing services as an independent contractor. Once you get started, you will be running a legitimate business.

As a small business owner, you should learn the basics of bookkeeping and recordkeeping, and you may also want to take marketing steps, such as listing your business in the Yellow Pages and setting up a basic website. For more information, see Nolo’s Business Accounting, Bookkeeping and Finance and Sales, Marketing & eCommerce areas.

For everything you need to know about being an independent contractor, get Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Gig Workers of All Types, by Stephen Fishman (Nolo) and remember you can purchase Independent Contract Agreement forms from our online store.

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