Becoming an Independent Contractor

Steps to Starting an Independent Contractor Business

Whether you are a writer, an engineer, a consultant, or  another independent working positions, if you aren't an owner or employee of a corporation, you are an independent contractor. This means you are self-employed.

Being self-employed means that in this position you aren't an employee and you have your own business, filing taxes as a business owner (sole proprietor or other business type). You should take the steps to set up a business entity. Here's why you should become a business entity and the tasks you need to start your business.

Why You Should Set Up a Business Entity as an Independent Contractor

Working for others as an independent contractor has benefits and drawbacks.

The benefits:

  • You are truly independent. You can run your business the way you want, with no one telling you what to do. 
  • You get all of the profits of the business. You don't have to share them with anyone.
  • You can decide how much money you take out of the business. You don't have a paycheck and you don't have to pay taxes on what you take out (the taxes are paid by the business based on its profits).
  • You can take deductions for expenses that are not deductible to you personally, like driving expenses, home business expenses, and depreciation on purchases of business property and equipment.

The drawbacks:

  • If you have all the profits, you also have all of the losses. 
  • You don't have benefits given to employees, like health care. 
  • Paying Social Security and Medicare taxes becomes your personal responsibility (it's called self-employment tax). These taxes aren't withheld from your paycheck (no paycheck, remember?)


Decide on Your Business Legal Type

The number of legal types is confusing. This list gives you an overview of each and directs you to more information about each type. If you are starting as an independent contractor or freelancer, consider forming a limited liability company. If you are making a product and planning on hiring employees, you might want to consider incorporating.

If you are working in a professional practice - dentistry, law, accounting, for example - you might want to set up one of the partnership entities.

If you are a solo contractor performing a service, you might want to start as a single-member LLC.  Learn more about the legal types of businesses so you can talk to your attorney about which is best for you. More

Apply for a Tax ID Number and Other Tax Registration

Even if you don't plan on having employees in your business, you should apply for a federal tax ID number (also known as an Employer ID Number or EIN). This number is a unique number for your business and it helps establish you as a business entity.

If you sell taxable products and services in your state, you will also need to register with your state for state sales tax purposes. Other state tax  More

Register your Business Name

When you have selected a business name, don't rush out and buy business cards and stationery yet. First, check to be sure no one else is using that name. Then, consider trademarking the name if it is unique. Finally, you may need to file a fictitious name (trade name, or d/b/a) statement if your business name is different from the name of your company. Learn more about these steps in registering your business name here. More

Set up Your Business Checking Account

Getting a business checking account will help establish that separate business entity, so it is clear to the IRS - and anyone else who cares - that you and your business are separate entities.

Getting a business checking account also establishes your credibility with vendors and suppliers, and it helps you keep those business and personal transactions separate.

Here are some considerations in setting up that checking account. More

Set up Your Business Record Keeping System

Capture the information you need to support your use of legitimate business deductions. Here is a simple system that will give you all the information for tax time. 

First, set up easy ways to capture the information on each business transaction. Then, check periodically to make sure you have all the information on each transaction. Enter the transactions in some kind of accounting system (online or desktop) and analyze the information every few months.  More