How to Successfully Be an Independent Contractor

Getting Started as an Independent Contractor

Owning your own business and working as an independent contractor is a great alternative for some professionals. However, many don’t realize that freelancers are subject to several laws about how they must conduct business and therefore end up putting their business at risk. This is easy to do because often independent contractors don’t realize that some part time work will suddenly become their career and so they don’t think to plan adequately.

Though it makes sense why this might happen, the fact of the matter is whenever you render a service to someone and receive payment, there are several government rules you must comply with. This is true if your position is a full career or never becomes more than something you do for a few hours each week.

There are three things that independent contractors must do to ensure they are running a legitimate and legal

business:

1. Name and register their business. (Registering it is only required in some states)

2. Register for a Vocational License (if needed) and Tax Certificate

3. Make sure to pay your estimated taxes throughout the year

Naming Your Business

There are several advantages to naming your business something other than your personal name. Namely it makes your business appear far more professional and therefore makes it easier to win client’s trust. However, when you choose a name, you need to register it. Any business that doesn’t use the actual legal name of the owner is required to register what is called a “fictitious business name.” This is true even if your business name uses part of your real name.

Without registering your business name with the government, you may be unable to enforce any contracts you make under that name, nor will banks open an account for your business without its name having the proper registration. Of course, using your full legal name does mean you do not have to register your business name. If your business is small enough, this might be just what you want to do. If this is the situation you are in, starting out this way might be best.

Registering a Fictitious Business Name

This is typically done at the county clerk’s office in most states, but in Florida, you register your fictitious business name with the State Department. Check with a qualified business attorney in your area if you are unsure where to file your fictitious business name.

Registering Your Tax Certificate

Depending on the city and county you live in, your business may be required to register for a tax certificate. In some cities and counties this is referred to as a business license, but this is simply a tax for the privilege of doing business within the city. All independent contractors need to file for a Tax Registration Certificate even if they work out of their home.

There are stiff penalties for failing to file that are far more expensive than registering, so it’s in your best interest to ensure you comply with local tax obligations before you incur expenses.

Do You Need a Vocational License?

Depending on the type of business you run, you may also need a vocational license to run a legal business. You may need to be licensed as a mechanic, contractor, therapist, etc. in order to legally provide such services and charge clients for them. If you are unsure, speak to a qualified and knowledgeable business attorney in your area.

Self-Employment & Estimated Income Taxes

If you are an independent contractor, no one holds anything out of your paycheck for medical insurance, social security, or tax obligations. This responsibility falls on the independent contractor. Setting aside the money to pay for the tax obligation each year is required of any independent contractor who makes at least $400* a year. The IRS also requires “estimated” tax payments throughout the year for contractors who make more than $3,000 annually.*

One way to avoid having to do this if you are employed elsewhere is to have additional taxes held out of your paycheck there to compensate for the estimated tax obligations.

Though it might appear tempting to not file and pay taxes, anyone who pays you more than $600 a year will be required to report it, so hiding from the IRS isn’t easy to do and it can jeopardize your business’s long-term viability. Yes, self-employment taxes are quite high, but not near as high as fees if you fail to meet your tax obligations.

Registering with the IRS

The best thing to do is to register as self-employed tax payer by (1) Filing the 1040-ES for your estimated tax obligations and (2) a Schedule C & Schedule SE at the end of the year with your 1040. These are all available from the IRS’s website.

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