Dreaming of ditching your 9-to-5 work and calling the shots on your career? Becoming an independent contractor might be the way to get there. But here's the truth: it's not for everyone. It's a path paved with flexibility and freedom, but it also requires a lot of self-discipline and a strong hustle mentality.
If you're wondering, “What do I need to be an independent contractor?” search no more. Here's everything you need to know about it.
What is an independent contractor?
Independent contractors are self-employed individuals hired to handle specific tasks or projects to clients, somewhat like temporary employees. As an independent contractor, you get to pick your assignments, set your own schedules, and often work for multiple clients at the same time. Key traits of an independent contractor include autonomy, flexibility, and being able to take charge of managing your own business operations and finances.
Independent contractors vs employees
This definition might vary depending on your location. But generally, employees are hired on a contractual basis, work under an employer's supervision, follow a set schedule, and often receive benefits like health insurance and retirement plans. On the other hand, independent contractors are self-employed individuals who provide services to long-term clients.
When you work for someone else you generally are covered under their legal protocol. “As an independent contractor, you are the only one who will be held legally and financially responsible for anything that goes wrong,” says Michael Sawyer, Operations Director at tour guide company Ultimate Kilimanjaro, who gained firsthand insight into how becoming an independent contractor could impact someone financially and legally when he decided to open his own company. “It’s a lot of responsibility to assume.”
Being a full-time employee has its perks—check out our open jobs on The Muse to find your perfect fit »
How to become an independent contractor
How do you become an independent contractor? First, consider if this career path aligns with your skills, personality, and professional goals.
“Understand your area of specialization, the prospects for work, and the liability involved,” says Andrew Pierce, CEO of LLC Attorney, a company dedicated to simplifying the process of opening a new business. “You should also establish a business structure that provides legal protection, like an LLC.” (We'll cover this in more detail later).
If you're comfortable managing your workload, chasing invoices, and dealing with a fluctuating income stream, it might be a great choice for you. Make it happen: Here's how to become an independent contractor in 8 steps.
Step 1: Choose your business structure
When becoming an independent contractor, the first step is to choose among the most common business structures:
- Sole proprietor: This is the simplest structure, where you and your business are legally the same. It’s easy to set up and has minimal costs. However, you are personally liable for all business debts and obligations.
- Limited liability company (LLC): An LLC offers limited liability protection, meaning your personal assets are generally protected from business debts. It provides flexibility in management and tax options but may require more paperwork and higher fees.
- S corporation (S Corp): An S Corp offers liability protection and potential tax benefits, as profits and losses can pass through to your personal tax return, avoiding double taxation. However, it requires more formalities and administrative tasks.
Each structure has its advantages and disadvantages, so consider consulting with a legal or financial advisor to check the best fit for your independent contracting business.
Step 2: Register your business name
Once you’ve chosen your business structure, the next step is to register your business name. If you plan to operate under a name other than your own, you will need to file a “Doing Business As” (DBA) name. Legal considerations include ensuring your chosen name isn’t already in use and following your state’s specific requirements for business registration.
Step 3: Obtain licenses and permits
The licensing and permitting rules can vary depending on your location and industry. Plumbers need a plumbing license, and food consultants require a food handler's permit. Do your research to ensure you're fully compliant. Check federal, state, and local requirements to ensure compliance. This might include professional licenses, health permits, or zoning permits.
Step 4: Get a tax ID number (EIN) and understand tax obligations
Getting an Employer Identification Number (EIN) from the IRS is crucial for managing your business taxes. As an independent contractor, you’ll need to understand your tax obligations.
“Managing taxes as an independent contractor is initially more complex, but can have its advantages,” Pierce says. “Establishing a firm divide between personal and business income, and taking advantage of relevant deduction possibilities is key. Hiring an accountant experienced with self-employed clients is also recommended.”
Step 5: Secure business insurance
Unlike your employee counterparts with employer-provided plans, you'll need to consider your own insurance needs. General liability insurance is a must-have to protect yourself from potential lawsuits. Depending on your industry, you may need additional coverage, such as professional liability insurance or workers' compensation insurance. Think of it as a safety net.
Step 6: Open a dedicated business bank account
Keeping your business finances separate from your personal finances is crucial. Open a dedicated business bank account to manage your income and expenses. This split simplifies bookkeeping and gives you a clear record of your transactions, which is important for tax purposes and financial management.
Step 7: Workplace safety and compliance
Creating a safe and compliant workspace is vital. Ensure your workspace meets legal and safety requirements, such as adequate ventilation, ergonomically designed furniture, and proper storage for dangerous materials if applicable, by researching legal and safety requirements specific to your industry. Understanding these requirements helps prevent workplace accidents and legal issues.
Step 8: Establish a recordkeeping system
Recordkeeping is essential for tracking your business’s financial health and meeting tax obligations. Put a system in place to track expenses, income, and mileage. Use accounting software or hire a bookkeeper for accurate records, making it easier to file taxes and manage your business finances.
Financial considerations for independent contractors
Finances are a top priority for anyone considering becoming an independent contractor. Managing your money effectively can make or break your success in this career path.
Paying taxes as an independent contractor
As an independent contractor, understanding and managing your tax obligations is crucial. You’ll need to pay:
- Federal and state income tax: Unlike traditional employees, independent contractors don’t have taxes withheld from their paychecks. You’ll need to make estimated quarterly tax payments to the IRS and your state’s tax agency to cover your income tax liabilities.
- Self-employment tax: It covers Social Security and Medicare taxes and is currently 15.3%. You can calculate your self-employment tax using Schedule SE when you file your annual tax return.
“A good rule of thumb for those who are self-employed is to set aside about 20% of your income for taxes,” says Sawyer.
Managing business expenses
Managing your business expenses in the right way can significantly impact your financial health. Many of these expenses are tax-deductible, which can reduce your taxable income and overall tax burden.
Common deductible expenses include office supplies, business travel, marketing costs, and home office expenses. Keep detailed records of all business-related expenses to support your tax deductions.
You will also need to keep accurate records for tracking your business expenses and income. Use accounting software or hire a bookkeeper to help you stay organized. Save receipts, invoices, and financial statements in a secure and easily accessible system.
Health insurance options for independent contractors
Another important topic to consider is health insurance. “As an independent contractor, you’ll have to provide your own health insurance, and it is not cheap,” Sawyer says. “If you hire employees, you will be responsible for their insurance as well, and this cost can really add up.”
You can opt for an individual health insurance plan through the Health Insurance Marketplace. These plans vary in coverage and cost, so it’s essential to compare options to find one that fits your needs and budget. Some professional organizations offer group health insurance plans for their members, with better coverage and lower premiums than individual plans. Research organizations related to your industry to see if they offer group health insurance options.
Building a safety net
Creating a financial safety net is crucial for independent contractors, as income can be unpredictable. “Getting used to not having a regular paycheck and then managing large deposits sporadically when I was just starting took some getting used to,” Sawyer says.
A good way to start is creating an emergency fund with at least three to six months’ worth of living expenses, giving you a financial cushion during periods of low income or unexpected expenses.
As an independent contractor, you’re also responsible for your retirement savings. Consider setting up a retirement plan, such as a Solo 401(k), SEP IRA, or Traditional/Roth IRA. These plans offer tax advantages and help you build a secure financial future.
Financial resources for small businesses and independent contractors
Several government and non-profit organizations offer financial resources and assistance to small businesses and independent contractors. The Small Business Administration (SBA), for example, offers loans, grants, and counseling services to support small businesses and independent contractors. Many non-profits also give financial assistance, training, and mentorship programs for independent contractors.
Finding success as an independent contractor
Now that you know how to work as an independent contractor, you'll want to ensure your professional success. This hinges on your ability to market your services and get new clients.
Effective networking is crucial—attend industry events, join professional organizations, and leverage social media to connect with potential clients. (Here are 33 networking tips you can read very fast.)
Online platforms like Upwork, Fiverr, and LinkedIn can also be valuable tools for finding projects and building your portfolio. When pitching your services, personalize your proposals to each client’s specific needs, showing your expertise, and how you can deliver value to their business.
Just as important is having clear contracts. “To best protect themselves, independent contractors should always document their agreements in writing,” says Pierce. “This includes scope, cost, timeline, and payment terms. Operating under an LLC can divide personal and business liabilities offering additional protection.”
You will also need to research industry standards to understand what others in your field charge and consider the scope and value of each project when setting your rates. Maintaining strong client relationships through consistent communication and reliable service will help you build a solid reputation, ensuring long-term success in your independent contracting career.
FAQs
Can you make money as an independent contractor?
Yes, you can make money as an independent contractor. However, your income potential will depend on various factors, including your industry, experience, and the demand for your services.
As an independent contractor, you have the opportunity to set your rates and take on as many clients as your schedule allows, giving you the potential to earn a substantial income. Plus, by managing your business expenses and taking advantage of tax deductions available to business owners, you can maximize your earnings and achieve financial success.
Do you need a business license to be an independent contractor?
Whether you need a business license to operate as an independent contractor depends on your location and industry. Some states and cities require specific licenses or permits based on the type of services you provide. Additionally, certain professions may have industry-specific licensing requirements. It’s essential to research the regulations in your area and consult with local government offices to ensure compliance.
Can I work as an independent contractor while still having a regular job?
Yes, you can work as an independent contractor while maintaining a regular job. However, it’s important to consider potential conflicts of interest and ensure you manage your time effectively to avoid burnout. Check your employment contract for any non-compete clauses or restrictions on outside work. You will need time management skills and clear communication with both your employer and your clients.