How To Become an Independent Contractor: A Complete Guide

You’ve become an expert at your craft, invested in the tools of your trade, and built relationships with suppliers and customers. Now, it’s time to explore the industry and get jobs on your own. 

But there’s more to learn. Being your own boss means learning how to think like an entrepreneur. And there are complicated tax details, scheduling skills, and business tasks to keep in mind as you begin this chapter. 

If you want to start things off strong, here’s a guide to teach you how to become an independent contractor.

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Independent Contractor or Employee: What’s the Difference?

As an employee, your employer formally hires and retains you, usually on a full-time basis. The employer decides how much you get paid and how and when to work. They might even dictate what you should wear or how to represent yourself on social media. 

None of that is true for independent contractors. They provide services to clients on a project basis, not permanently. How and when the contractor works is between them, the client, and the terms of their contract. 

As a self-employed contractor, you depend on yourself to make money and run the business the way you want. That means you have the freedom to set your own hours, negotiate your pay, and work for multiple clients at the same time to boost your earnings. 

But self-employment comes with responsibilities. You’re on your own for things like unemployment tax—taxes an employer would cover for a full-time employee. That also includes both the employer and employee portions of the FICA tax that covers Medicare and Social Security. 

Since there’s no employer withholding taxes for you, you need to make estimated payments to the IRS throughout the year. You have to be organized and responsible enough to manage the business by yourself. 

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The Pros and Cons of Being an Independent Contractor

Here’s a closer look at the pros and cons of being an independent contractor.

Pros

• It’s easier to make a backup plan. Having multiple clients gives you more than one source of income. If a client falls through, you’ll have others to lessen the stress and financial load. When you get laid off as an employee, the stakes are much higher.
• You can build the schedule you want. You’ll work with your clients to settle on a schedule. But you have a lot of control over the hours you work to complete the job. This offers flexibility, which is helpful for working parents or people with other responsibilities.
• All the profits are yours. Employees get a cut of the profits from the work they do. But as an independent contractor, you keep 100% of what you earn, besides what you pay in taxes. 
• You can write off lots of expenses on your taxes. You might be able to lower your tax bill by deducting your car, home office, and other business expenses.

Cons

• The profits are yours, but so are the losses. You’re responsible for your business’s success and failure. If anything goes south, you’re the one who has to deal with the consequences.
• You’ll have to set up your own health insurance. Many full-time employees get health insurance through work. As an independent contractor, you’re responsible for your own benefits. And getting your own healthcare coverage or other insurance costs a lot. 
• Your income might be unpredictable. Demand for your services might go up or down depending on the market or season. You can’t always predict your income, and things can get precarious if you don’t plan ahead. But when you’re formally employed, income is generally the same every paycheck.
• You need to pay self-employment taxes. No payroll taxes mean no employer paying half of your FICA tax. The IRS expects you to pay estimated taxes throughout the year. And those amounts add up.
• You won’t get paid vacation time. Lots of employees get sick days and paid time off (PTO). But when you work for yourself, no one pays you to take breaks or go on vacation. When you aren’t working, you aren’t getting paid.

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6 Steps to Become an Independent Contractor

Ready to learn how to become a contractor, from 1099s to licensing? Here’s what you need to do:

1. Figure Out Your Business Structure

The first step is to decide how you want to legally structure your business. This affects how the IRS taxes you. You have a few choices:

• Sole proprietorship. This is the simplest, most common structure for independent contractors. You’re the only owner, and you’re liable if things go wrong.
• Partnership. A partnership is like a sole proprietorship, but you have one or more partners who share the business’s profits, losses, and liability with you.
• Limited liability company (LLC). An LLC is also similar to a sole proprietorship, but you’re not personally liable for the business’s debts and obligations.
• Corporation. Corporations offer the most protection from personal liability. But the tax and regulatory requirements are more complex. This option is better for larger businesses with multiple staff.

2. Pick a Business Name and Register It

Next, choose a name for your business. Make sure no one else in your state has a business by that name. This prevents tax and operations complications. You can check your state’s business registration website to confirm the name is available.

If you’re a sole proprietor and plan to use your name as the business name, you probably won’t need to register it with the state. But if you make up a name, or if you form an LLC or corporation, you have to register as self-employed with your state or county clerk’s office. The rules vary state by state, so check beforehand.

3. Get a Tax Registration Certificate

In the US, employees use their Social Security number (SSN) to file taxes. But as a business, you need an employee identification number (EIN). This number lets you file taxes and open a business bank account. It’s easy to apply online through the IRS website.

You might also need to register for state sales tax, income tax, or other taxes. Check with your state’s tax authority to see what requirements you have to meet. If you’re confused by the process, a certified public accountant (CPA) can help.

4. Get Any Vocational Licenses You Need

Some independent contractors need a license to offer services in their state. Check with your state’s licensing board to see if you need to complete training courses or pass exams to show them you’re qualified to do the work. For example, plumbers and electricians need licenses in most states.

If you do need a business license, you have to submit an application, pay any required fees, and meet any ongoing requirements to keep the license valid.

5. Start a Dedicated Business Bank Account

Having a business bank account—instead of using your personal one—keeps finances separate and helps you track income. Research banks and credit unions to see who has the best fees, services, and online banking options for your business needs. 

Once you’ve picked a place to bank, gather up your EIN, business registration documents, and personal identification. Then, complete the bank’s application process and add some funds to get your new business account going.

6. Set Up a Way To Receive Payments

Report all earnings over $600 to the IRS. Your clients should send you a 1099-NEC form summarizing the payments they gave you. Keep track of every 1099 you receive. You’ll need them to file your taxes.

To streamline your payment process and stay organized, consider using an online payment platform like Joist. With Joist, it’s easy for clients to make online payments. Joist also lets you send invoices, track payments, and get paid faster.

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How To Thrive as an Independent Contractor: 4 Tips

It takes work to get started as an independent contractor. But the real work starts after you launch your small business. Follow these tips to help make your efforts pay off:

1. Invest in Yourself 

Take continuing education courses. Attend conferences related to your industry. Network with other professionals in your field. These types of investments will help you learn new skills, stay up-to-date on industry trends, and make valuable connections to grow your business.

2. Nurture Your Client Relationships

You’ll have a lot more success if you can drum up repeat business and get former clients to refer you to their friends. And building strong relationships keeps your customers coming back for more. 

Joist makes client management easy, helping you stay organized and manage customers and projects on the go. Be responsive, communicative, and committed to delivering high-quality work on time—and on budget. A happy client is a loyal client, and loyal clients are an independent contractor’s bread and butter.

3. Keep Your Rates Competitive

Research what other contractors in your area charge for similar services. Use that knowledge to set fair rates. Don’t undersell yourself, but be realistic about what the market will support. You can always adjust your rates as you gain experience.

4. Market Your Business

Network. Make a professional website. Offer promotions. Put a custom vinyl wrap on your truck. Think of every possible way to get the word out about your business. Potential clients can’t hire you if they don’t know you exist. When you’re just starting out, marketing is certainly worth the investment.

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Make Collecting Payments the Easiest, Most Efficient Part of Your Business

What do you need to do to be an independent contractor? The most important thing is to set up systems that support your success.

Joist makes it easy to manage clients and accept credit card payments from anywhere. Simply issue your invoice, switch on Payments, and get paid. You cut cash flow delays and have more time to organize other parts of your business. Choose Joist today.