Working as an independent contractor is an excellent way to bring in extra money or work for yourself. Whether you provide freelance writing, graphic design, or other services to clients, being an independent contractor allows you to control your schedule and have greater job flexibility. However, working as an independent contractor requires tax and legal processes of which all contractors must be aware.
The requirements for operating as an independent contractor in the United States depend on the state where you work. Some states even require independent contractors to acquire a business license before conducting business. Continue reading for everything you need to know about legally operating as an independent contractor, including answers to the questions:
- Does an independent contractor need a business license?
- Does a 1099 contractor need a business license?
- What is a business license?
- How do you obtain a business license?
- What other precautions must independent contractors take?
Do You Need a License To Be an Independent Contractor?
Whether or not you need an independent contractor license or a business license depends on where you reside and work and the nature of your work. Individuals are considered independent contractors if they control the nature of their services. Independent contractors may perform services ranging from graphic design to legal help. With independent contractors being a broad category of work, the legal requirements vary depending on the nature of one’s service offering.
Some states, like Texas and Washington, require all businesses to acquire a business license. Thus, you may need a business license if you are an independent contractor operating as a limited liability company (LLC). Independent contractors who perform higher-risk services, like contractors, doctors, lawyers, architects, and others, will undoubtedly need a business license. These workers must also comply with local zoning regulations and CC&Rs (codes, covenants, and restrictions). Additionally, they may require vocational licenses for specialized lines of work, such as therapists, real estate agents, or estheticians.
However, less intrusive services like freelance writing, graphic design, and software development are often in the clear when it comes to obtaining a business license. Nonetheless, all independent contractors should research the local regulations for the state and city in which they reside. Additionally, contractors should confirm whether or not a business license is required for their work before applying for a license to avoid unnecessary complications that would otherwise fly under the radar.
To confirm whether you need a business license for your work type and location, you may contact your local Chamber of Commerce or city tax office.
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What Exactly Is a Business License?
A business license is a license a state, city, or government must obtain before conducting business. Various states and cities require business owners to get a license to operate their businesses legally. A business license also acts as a tax registration certificate for filing annual business taxes. Companies may require a business license, including some independent contractors who own LLCs. Business licenses are typically required for all brick-and-mortar establishments and professionals who require industry-specific vocational licenses.
If a business license is required, it should be obtained as soon as possible. Failure to obtain the necessary business license may result in penalties, fines, and payment of back taxes, as well as an order to cease operation. Thus, it’s essential for business owners to obtain all necessary business licenses and permits.
How Do You Get a Business License?
If you have determined you need a business license for your independent contractor operations, you can visit your local state’s online business registration portal. Make sure to talk with a local business operations office to confirm you need a business license prior to applying. On your state’s website, there should be additional information on who needs a business license and the necessary steps to take to get one.
Your state’s website may have an online application portal or a printable application to mail to the state tax authorities. To apply, simply fill out the application with the required information, such as your business name and tax ID. Depending on your type of work, you may also need to apply for a vocational license or seller’s permit.
Additionally, if a business license is required for your work, you will likely want to operate under a registered business. This might look like establishing an LLC or a Doing Business As (DBA). While establishing a business may seem daunting, it can be an easy process that pays off in the long run by allowing for more tax deductions and excellent legal protection. You can establish an LLC or DBA quickly by using an online legal service.
What Else Do You Need To Get Started as an Independent Contractor?
In addition to assessing whether you require a business license and obtaining one if so, there are a few steps every independent contractor must take to offer services to clients legally. To get started as an independent contractor, you will need to:
- Obtain a tax registration certificate
- Report and pay self-employment taxes
- Report and pay estimated income taxes
- Create a record-keeping system
- Create contract templates to use with clients
In addition, establishing an LLC is typically a smart move for any independent contractor. Working as an LLC not only makes taxation smoother, but it protects you as an individual from legal issues by separating yourself from your business. To work as an LLC independent contractor, complete the above list in addition to the following:
- Setting up a business checking account
- Creating and registering a business name
- Registering your LLC
- Paying the appropriate taxes as an LLC
- Obtaining general liability insurance
All independent contractors must report their earnings yearly to the IRS if they make over $400. Thus, it’s essential for contractors to set aside money for taxes each year. Additionally, all independent contractors must track their earnings and business expenses thoroughly to ensure their reported income and tax payments are accurate.
When filing taxes as an independent contractor, you may need to fill out the following forms:
- 1099 – Contractors working as 1099 employees for a company will receive a 1099 form in January of each year.
- W9 – Contractors providing services to a company must fill out a W9 form before starting work.
- 1040-ES and 1040 – 1040-ES are your estimated tax returns as an individual that you may pay in advance. 1040 is your finalized tax return as an individual.
What's the Difference Between Being Self-employed and being a Business Owner?
Being self-employed and a business owner are often one in the same thing. All self-employed individuals can be business owners, but not all are self-employed. For example, you can be a self-employed contractor who owns an LLC business, as LLC owners pay taxes as sole proprietors.
According to the IRS, someone is self-employed if they:
- Conduct business as an independent contractor or sole proprietor
- Are in a business or trade partnership
- Conduct full or part-time business for themselves
Thus, sole-proprietor business owners who operate an LLC or DBA are likely self-employed, while those who own S or C corporations and do not file self-employment taxes are not self-employed.
Do You Need To Be an Independent Contractor To Be Self-employed?
All independent contractors are self-employed, but not all self-employed individuals are independent contractors. Thus, you can be someone other than an independent contractor to be self-employed. While independent contractors may offer services, own businesses, and more, self-employed individuals may only be business or startup owners. For example, a business owner who sells products may be self-employed, but since they are not selling services to multiple clients, they are not independent contractors. Another critical difference between contractors and self-employed individuals is that many contractors work under a 1099 form, while a self-employed business owner does not.
Can You Be an Independent Contractor and Employee at the Same Time?
Individuals can be independent contractors and employees simultaneously. An individual can have a full-time job as an employee while having a part-time side hustle as an independent contractor. An employee of a company may take on additional contractor work for that company, such as for a specific project.
Correctly classifying workers as independent contractors or employees is essential for businesses. Misclassifying the two types of workers can lead to fines, legal issues, and back payments of wages and benefits. However, this responsibility falls solely on the employer of a contractor or employee.
The Benefits of Being an Independent Contractor Outweigh the Initial Paperwork
While getting started working as an independent contractor may seem complicated, the benefits ultimately outweigh any difficulties. Once you are set up and ready to work as an independent contractor, you will reap the rewards of flexibility, work-life balance, and earnings, all while doing something you enjoy.
Skuad Can Help
Skuad helps organizations hire independent contractors compliantly in over 160 countries without the organization setting up a subsidiary. Skuad makes it easy to build and manage global teams, legally work with contractors, and much more. Request a demo today to see how Skuad can help your business thrive.