How to Become an Independent Contractor

by Neal Frankle, CFP ®

If you are wondering how to become an independent contractor, I can already tell that you are a pretty smart cookie. If you are looking for full-time work or just a second job, you’ll likely find it easier to get hired as an independent contractor rather than as an employee. Why? Because it’s much less expensive for an employer to hire a contractor.

The employer saves on taxes, doesn’t have to worry about paying you when she doesn’t have work, won’t have to provide you with tools and equipment (you’ll be expected to provide these on your own) and can terminate the relationship without any downsides.

The more you can present yourself as a legitimate independent contractor, the more attractive and easier to hire you’ll be. How do you become an independent contractor?

1. Select a Name

Pick a name that describes what you do and who you do it for. This will be important for marketing later on. Print up invoices and business cards with your business name rather than your own personal name. It just looks much more professional.

In most cases, you’ll have to file a fictitious business name statement or a DBA – doing business as – statement. This is very easy to do and it’s inexpensive. You can either call your county clerk’s office to find out how to get this done, or you can Google “Fictitious Business Name Statement.” There are small newspapers that fulfill the publication requirement (for a fee of course), and they’ll have all the documents you’re country requires. HINT – If you go this route, select the cheapest alternative.

2. Get a License

Some cities and counties will only let you conduct business if you have a license. This is simply a question of filling out a form and paying a fee. It’s usually not a lot of money. Even if you operate out of your home, you should get this done. The penalty for non-compliance will be several times the fee, and you will waste time cleaning up the mess. Go to the city clerk’s website to download the forms. Depending on your trade, you might have to apply for a special professional or vocational license. Your trade association will know, so contact them (or your state’s website) to learn more.

3. Taxman

As an independent contractor, you’ll have to take care of all your own tax payments. I strongly recommend you speak to a tax professional about how to set up your business. Should you be a sole proprietor? A Professional LLC? Do it right. The last thing you want is to create tax audit flags.

Your tax person will likely ask you to make quarterly payments (if your business rakes in more than $3,000 or $4,000 a year in gross income). If you don’t pull in much money as an independent contractor, you can skip this if you have another day job. Just ask your employer to withhold more from your paycheck.

Remember, taxes are a key benefit of being an independent contractor. You can deduct lots of business expenses that employees can only dream about. You might even be able to create a tax loss and, as a result, lower the income tax due on your other income from your day job.

If possible, start paying estimated taxes. This will strengthen your case and prove that you indeed are an independent contractor.

These three steps will get you set up to become an independent contractor. Once you do that, it will be easier to launch your new business and find work. Make sure to set up good bookkeeping and budgeting for small business systems. And don’t forget about getting the right business insurance.

Are you an independent contractor? Does this reduce your tax liability? Is it helpful in other ways?

photo by TheWarners, Flikr

 

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{ 7 comments… read them below or add one }

tim April 6, 2013 at 4:39 AM

my employer is thinking making there only 2 employees (me and my brother-in-law) contract labor instead of employees. and i don’t like the sound of that. me and my brother-in law all ready do side jobs. and if all goes well ill be a master plumber and he a JP next month so what do you think we should do??

Reply

Neal Frankle April 6, 2013 at 9:13 PM

What don’t you like about it? What options do you have? If the boss is trying to do this just to save money, you are going to come up with short end of the stick when it comes tax time. Plus….the boss can only do this if you and your brother in law really are contractors and adhere to the requirements.

Reply

tim April 7, 2013 at 2:32 PM

lol we really have no options. we just have to do what ever they shove down our throats. they have always seen it like a master slave kind of thing, this is a very old and small family bis. there was a prob on the taxes this year and that is what brought it up so yes im sure it is just to save money. id just like to know what laws i can bring to there attention to persuade them it is best to keep us as employees and not and not try this contract labor thing, that they know nothing about other than thats what other companies do. and not to sound like a know it all jackass but these are just some good ole country boys who know more about hunting and farming than they do about running a business.

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Gwen February 23, 2013 at 1:18 PM

I am considering an on-line business and would like to know if I can use an independent Licensed Drug Counselor.

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Adam Gottlieb March 23, 2011 at 6:11 AM

Those considering becoming an independent contractor should also make sure that they do not agree to work with *any* individual or company without reviewing and signing a detailed Independent Contractor’s Agreement.

This little bit of due diligence will save you a lot of time and money later on.

Reply

krantcents March 17, 2011 at 10:06 AM

During this time of high unemployment, many people are working on a contract basis. I am referring to professionals like lawyers, accountants, etc. They are hoping that it may turn into a permanent job.

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Dr. Timothy Lawler March 17, 2011 at 7:36 AM

Great overview, but I think that you would agree that there are MANY more details to going into business for yourself. I think it is wise to set up a LLC, for the liability protection alone. In this sue-crazy world we live in, you have to protect yourself. Great site. Keep up the good info.

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