Steps to Becoming an Independent Contractor

Although many freelance workers relish the freedom associated with working as independent contractors, some struggle to handle the extra responsibilities. Navigating business licensing, taxes, and understanding business entities can be daunting. This article breaks down the process of becoming an independent contractor into six simple steps and answers common questions.

Do You Classify as an Independent Contractor?

It’s estimated that around 15% of all workers are independent contractors. Many freelancers, especially those new to the field, may not know if they classify as a business. While there isn’t a standard test for independent contractor status, the guidelines below can help determine your category.

What’s the Difference Between an Independent Contractor and an Employee?

The definition varies by location, but generally:

• Employees are hired on a contractual basis with a permanent employment relationship.
• Independent contractors are self-employed workers hired for specific tasks or projects without a long-term commitment.

Misclassification of employees as contractors or vice versa can result in heavy fines, penalties, and loss of intellectual property. This makes many companies hesitant to work with independent contractors.

Are Freelancers and Gig Workers Independent Contractors?

Freelancers and gig workers are subsets of independent contractors:

• Freelancers often work in creative, technical, or professional fields like writing, graphic design, programming, or consulting. They manage multiple clients and projects.
• Gig workers earn income through short-term, on-demand jobs facilitated by digital platforms (e.g., rideshare drivers, food delivery).

Key Differences:

• Contracts: Independent contractors typically have formal contracts; freelancers might not. Gig workers follow platform terms.
• Services Performed: Independent contractors and freelancers usually offer specialized services; gig workers perform less specialized tasks.
• Autonomy: Independent contractors and freelancers have more control over their work. Gig workers’ autonomy is limited by platform rules.

Licensing and Certification Requirements:

• Independent contractors and freelancers: May need specific licenses or certifications depending on the profession (e.g., electricians, therapists).
• Gig workers: Typically do not need specialized licenses unless required for regulated professions.

Pro Tip: Check your state’s Department of Labor for details on your independent contractor profession.

How to Become an Independent Contractor in 6 Steps

1. Decide on a Business Structure
   • Sole Proprietor: You are the exclusive owner without legal distinction between personal and business assets.
   • One-Person LLC: Separates personal and business assets; requires business registration.
   • Incorporation: For hiring employees or selling products.
   • Partnership: For professional services with another professional.
   Consequences of Not Choosing a Business Structure: Default to sole proprietor; potential penalties if hiring employees or partnering without registration.
2. Choose and Register Your Business Name
   • Register if your business name doesn’t include your full legal name.
   • Consequences of Not Registering: Cannot enforce contracts, open a business account, or prevent others from using your name.
3. Get Your Tax Registration Certificate
   • Required for tax purposes; varies by city.
   • Consequences of Not Getting One: Penalties, fines, and potential misdemeanor charges.
4. Obtain Required Vocational Licenses
   • Check if your profession requires a license.
   • Consequences of Not Obtaining a License: Considered fraudulent; may face fines, penalties, or criminal charges.
5. Open a Business Bank Account
   • Separates personal and business finances; aids in managing taxes.
   • Consequences of Not Opening One: Potential tax calculation errors, missed payments, and penalties.
6. Set Up to Get Paid
   • Use contract agreements, invoice templates, and payment mechanisms.

Benefits of Working as an Independent Contractor

• Freedom and Flexibility: Set your hours and design your schedule.
• Variety of Clients and Projects: Choose exciting projects.
• Improved Work-Life Balance: Greater flexibility for time off.
• Financial Control: Keep all profits and decide on business investments.
• Lucrative Career: Set higher fees with experience.
• Tax Deductions: Claim business expenses like driving costs and depreciation.

Pro Tip: Use a contractor management platform to collaborate globally and simplify payments.

Potential Drawbacks

• More Responsibility: Handle all business aspects.
• No Employee Benefits: Manage your own benefits like health insurance.
• Self-Employment Tax: Pay for your own social security and retirement.
• Inconsistent Income: Varies month to month but can be managed.

How to Pay Taxes as an Independent Contractor in the US

• Self-Employment Taxes: Covers Social Security and Medicare.
• Quarterly Estimated Payments: Prevent large year-end bills.
• Annual Tax Return Filing: Report income and expenses on Schedule C.

Penalties for Non-Compliance: Late payments, underreporting, and negligence can result in substantial penalties.

Independent Contractors in Other Countries: Tax obligations vary; some countries have simpler systems or require VAT/GST registration.

Streamline Your Journey with Baaraku

Working for yourself is not easy, but it offers the freedom and flexibility to manage your own business. Enjoy the professional and financial rewards of your hard work and dedication as an independent contractor.