What You Need to Know as an Independent Contractor
You start earning money and suddenly realize you've got a legitimate business on your hands. You might think of yourself as a consultant, a freelancer or self-employed — someone who is hired to do a particular job and receives payment only for the work done. You're an independent contractor.
You don't receive employee benefits or work under the same legal protections as employees and often are responsible for your own expenses, but that magical word "independent" explains the lure.
You'll have some basic business startup requirements to fulfill. After all, when you provide services and get paid, you need to comply with some government rules.
Many cities and counties require businesses — even single-owner, home-based operations — to register with the local tax collector to obtain a tax registration certificate, sometimes called a business license. These certificates are inexpensive, while penalties for operating without them can cost hundreds of dollars.
As an independent contractor, because you don't have taxes — income, Social Security or Medicare — withheld from a paycheck, you have to handle all these taxes. You need to set aside enough money to pay your tax bill each year.
If your business is profitable, the IRS requires you to pay your taxes in four installments during the year via advance payments of your income and self-employment taxes, called estimated taxes. According to the IRS, "Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed." Consult with a professional to see if estimated taxes apply to you.
Setting yourself up as a self-employed taxpayer with the IRS starts by paying your estimated taxes using Form 1040-ES, Estimated Tax for Individuals, and by filing Schedule C, Profit or Loss from Business, and Schedule SE, Self-Employment Tax, with your Form 1040 tax return each April.
By being clever about deducting your expenses, you might not end up paying taxes on much income at all: Independent contractors can deduct many more expenses than employees, often lowering income for tax purposes by as much as 50 percent.
Besides taxes, you'll have to think about health insurance and other benefits because clients are not required to pay them, according to the Fair Labor Standards Act, nor do they have to pay overtime or minimum wage.
At about this point, you may be wistful that there'll be no more invitations to the company picnic, but you never know, you may be invited to several — for each of your clients. It's a good idea to define your exact business relationship with your customers.
You'll probably want to create a standard agreement for your services — you can find a sample at the U.S. Chamber of Commerce's website. Look at this as a legal document between you and your client. And then you'll want to find resources to help you connect with potential clients and to locate opportunities.
As a small business owner, you should learn the basics of bookkeeping and record-keeping, and take marketing steps that may include listing your business in the Yellow Pages, setting up a basic website and joining social media sites such as LinkedIn.
Factors that tend to define a worker as an independent contractor include not relying on one client as the sole source of income — although it happens and makes life easier — working at your own pace, being ineligible for employer-provided benefits and retaining a degree of control and independence. Independent contractors are their own bosses.
The tax situation for independent contractors can be complex, but there are a lot of opportunities for saving on taxes. We'd be happy to address your situation.