What Is an Independent Contractor?

An independent contractor professional helps businesses or individuals by providing labor, goods, or services in exchange for a specified fee. 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

The following are 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 considering how to become a private contractor, the first step is to determine 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 other services. 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 the establishment of 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 opportunity for brainstorming. Choosing a business name is crucial when becoming an independent contractor and starting a new venture.

This name differentiates your business from your competitors in 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 own 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 are required to register with the local tax collector according to their rules.

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 result in penalties and fines.

4. Get a Professional or Vocational License

A professional or vocational license is a crucial element of the list of requirements for independent contractors. 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 on 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 an individual entity, it is necessary to have a separate business checking account. This makes financial management simple and handy. Additionally, there will be fewer chances of confusion, as everything will be clearly framed.

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. Always maintain 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 and share it with your client. Showcase all the details related to your contractor services in your invoice. Highlight the total due amount, due date, and other details. Provide multiple payment options to your client. This will not only offer convenience to your customers but also allow you to receive payment quickly.

Moon Invoice: The Best Invoicing Solution for Contractors

Independent contractors can streamline their billing process with Moon Invoice. The popular right invoicing partner simplifies billing by offering a free contractor invoice template in Word, Excel, Google Sheets, Google Docs, and PDF formats.

1099 contractors can craft an outstanding invoice in less time with speed. Additionally, the templates enhance accuracy by providing an auto-calculation concept. Thus, there are no chances for errors. It helps professionals save time & money, keeping their business financially healthy with a smooth cash flow.

Key reasons to choose Moon Invoice

• 66+ custom & free templates
• 100+ currencies support
• 15+ payment gateway integrations
• Automatically calculate your total amount
• Auto-tax calculation
• Tracking projects working/billable hours
• Offers recurring invoices
• Contractor estimate template for generating estimates
• Receipt generation
• Handy to download and print the invoice
• Checking the activity log
• Signature request
• Make duplicate copies of the invoice
• PDF and print settings
• Comprehensive financial report generation
• Expense tracking
• Easy sharing of invoice, estimate & receipt via WhatsApp or email

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 are required to make estimated tax payments to the IRS quarterly when their tax liability exceeds $1,000 during the tax return filing period.

Form 1040-ES is useful for calculating and paying estimated taxes. Independent workers can easily calculate 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 helpful to deduct business expenses, such as those for suppliers, home office expenses, and travel. This helps reduce taxable income and tax bills through tax credits.

How Are Independent Contractors and Employees Different?

Several key differences distinguish independent contractors from employees. Here is a tabular structure of independent contractors vs employees:

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 the flexibility of 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 focus on your other crucial work or spend 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 deductions on your 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 offer various benefits to their employees, but independent contractors typically do not receive such benefits. This is the major disadvantage of working independently.

Income Variation

Independent workers often experience fluctuating income from month to month. However, this scenario is at the beginning. Once you establish a stable business, you can expect a 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 if the business goes into a bad condition. Still, as the sole responsible person and owner of the business, you can predict issues and fix them.

Last Remarks

Choosing an independent worker is a good decision when you prioritize work flexibility and a high income. This profession provides an optimal work-life balance and enables you to have full financial control. However, you must be dedicated, stay up-to-date with the latest market trends, and implement a smart invoicing process.

The steps outlined above provide the answer to the question of how to become an independent contractor. Are you dreaming of pursuing a career in this field? Follow the above strategy wisely, and also consider utilizing construction invoicing software to streamline the overall billing process.

Frequently Asked Questions