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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