Independent contractors and freelancers must comply with several laws.
many independent contractors ( ICs ) start earning money without in truth planning on it. Before they know it, their avocation projects have become legitimate businesses — which means that they have to fulfill some basic business start-up requirements. Whenever you provide services and get paid, you must comply with several politics rules, even if you work merely a few hours per week .
At a minimum, do these four things when you ‘re first starting out as an freelancer contractor :
- Make sure you really qualify as an independent contractor
- Choose a business name (and register it, if necessary).
- Get a tax registration certificate (and a vocational license, if required for your profession).
- Pay estimated taxes (advance payments of your income and self-employment taxes).
Make Sure You Really Are an IC
first base, make certain you are an mugwump contractor and not an employee. You ‘re an autonomous contractile organ if you ‘re in business for yourself. You ‘re an employee if you work for person else ‘s business and are subject to their control condition.
If you ‘re treated like an employee, you should be classified like one by the business you work for. As such, you ‘ll be entitled to employee benefits like health policy. But you wo n’t get to deduct business expenses like mileage. Employees do n’t need to take the steps described below. On the early hand, if you want to be an mugwump contractor, taking these steps will help solidify your status as one .
Tests for Independent Contractor Status
unfortunately, there is no demand test to determine if you ‘re in business. The IRS and many other government agencies use the “ good of control ” test. Under this test, a worker is an employee if the hire firm has the right to direct and control the manner the actor performs—both as to the concluding results and the details of when, where, and how the work is done. If the hire firm ‘s control is limited to accepting or rejecting the concluding results the proletarian achieves, then that person is an mugwump contractile organ .
Factors that show you are an autonomous contractor include working with multiple clients rather of just one, not receiving detailed instructions from hiring firms, paying your own business expenses such as office and equipment expenses, setting your own schedule, market your services to the populace, having all necessary clientele licenses, working outside the hire firm ‘s premises, not receiving employee benefits like health indemnity, paying all your own Social Security and Medicare taxes, and using written mugwump contractor agreements .
Are Gig Workers Independent Contractors ?
proper classification can prove particularly unmanageable for “ gig workers ” who work for on-line lease platforms like Uber, Lyft, TaskRabbit, Upwork, Postmates, and many others. Gig workers are normally classified as independent contractors by their on-line rent platforms. The hiring platform ‘s contract will typically contain a provision that the spear worker is an autonomous contractor and that the worker agrees to such condition .
however, there is debate about whether classifying gig workers as freelancer contractors is right. In many cases, the mugwump contractile organ categorization seems amply justified. This is particularly true for workers who have a large quantify of manipulate over their work—for exemplar, where the lease chopine allows providers to select or refuse jobs, set their own hours and pay, and control other aspects of their study. On the other bridge player, some rent platforms exercise more control over price-setting and grant decisions than is typical in an mugwump contractor-client relationship .
Some states, notably California, have tried to make it much harder for gig workers to be classified as freelancer contractors. Hiring platforms like Uber/Lyft are fighting hard against these efforts. The bottom line : presently, if you want to obtain ferment through an on-line rent chopine, you ‘ll normally have to accept being treated as an independent contractile organ .
Choose a Business Name
It ‘s a thoroughly idea to choose a occupation name that you can use on your invoices and business cards. Using a business name preferably than your own identify appears more professional .
Depending on the name you choose, you may have to register it with the politics. Any business that does n’t use the legal diagnose of its owner as separate of its business name must register the name as a fabricated business diagnose ( called an assume name or a DBA — “ doing occupation as ” — in some states ). This allows customers to easily contact the business owner with a charge or to take legal action against the clientele. For exemplar, Madeline Quinn names her consult business “ Madeline Consulting. ” Because the occupation name does n’t include her full name, Madeline must register it as a fabricated business name .
There are other reasons to register your clientele diagnose. First, you wo n’t be able to enforce any contract that you sign under an unregistered name. Second, many banks wo n’t open an report under your occupation name unless you provide proof that you have by rights registered the list .
Skipping This Requirement
If you use your full moon name in your business name, you do n’t have to register it. For exemplify, many contractors who run small servicing businesses merely add a discussion or two after their full name to come up with a commercial enterprise name, such as Aidan Ray Editorial or Mike Russell Architectural Services. You can start using a name like this without filing any paperwork. For aid choosing a business name, see Pick a Winning list for Your business .
How to Register Your Fictitious Business Name
In most states, including California, you register your assumed business name at the county level, with the county clerk. different counties much have different forms and fees for registering a name. ( In a few states, such as Florida, you register a assumed name with a country position, such as the Department of State. )
The best thing to do is call your county clerk ‘s function to find out its procedures, requirements, and fees. For more information, see Registering Your business mention .
Get a Tax Registration Certificate
many cities and counties require every business — even single-owner, home-based operations — to register with the local tax collector and obtain a tax adjustment certificate. This certificate is sometimes called a business license, but it is basically a receipt for the tax you must pay for the privilege of doing business in a city, and nothing more .
If you operate your business out of your home, you normally need to get a tax registration certificate in the city where you live, even if none of your clients are in that city. Contact your city salesclerk for an lotion .
Skipping This Requirement
Some autonomous contractors fail to register, figuring they can stay under the local government ‘s radar. But consider this : tax registration certificates are cheap, while the penalties for operate on without a license can be hundreds of dollars. In addition, in some locales it is a misdemeanor to violate city ordinances by operating without a tax registration security .
Getting a Vocational License
Depending on your trade, you may besides have to get a professional or vocational license. For exemplify, some states license car mechanics, barbers, massage therapists, and real estate of the realm agents. Ask your trade association or go to your state of matter politics ‘s web site to see if you need a particular license. For more information, see Licenses & Permits for Your business .
Pay Estimated Income and Self-Employment Taxes
Unlike employees, who have income taxes and other taxes ( Social Security and Medicare taxes ) withheld from their paychecks, independent contractors have to handle all of their own taxes. This means you have to set apart enough money to pay your tax poster each year. All autonomous contractors who make more than $ 400 per year from commercial enterprise activities must report their business income to the IRS. For general information on paying taxes as a freelance business owner, see How Sole Proprietors Are Taxed .
In addition, if your business is at all profitable, the IRS requires you to pay your taxes in four installments during the year, called paying “ estimated taxes. ” ( If you will bring in more than $ 3,000 in adjusted crude income from business activities in any year, design on paying estimated taxes. ) For more information on estimated taxes, see Paying Estimated Taxes .
Skipping This Requirement
If you have a day job, you can avoid making estimate tax payments by asking your employer to increase the income withhold from your paycheck to offset the taxes that will be due on your commercial enterprise income .
Some nickel-and-dime independent contractors skip paying taxes on their freelance or consulting income wholly. But before you consider hiding income from the IRS, you should know that penalties and interest on back taxes, particularly self-employment taxes, can be quite high. besides, any client who pays you more than $ 600 by check or cash in any calendar class must report the income paid to you to the IRS, and the IRS will check your tax returns to see whether you are reporting this income .
It ‘s better to bite the bullet and fair pay taxes on your clientele income. By being apt about deducting your expenses, you may not end up paying taxes on a lot income at all — mugwump contractors can deduct many more expenses than employees, frequently lowering their income by vitamin a much as 50 % for tax purposes. In addition, sometimes your business activities can produce a tax personnel casualty that can reduce your taxable income from other work. For more data, see Operating Losses : Prove Your Hobby Is a business .
How to Register With the IRS as an Independent Contractor
To set yourself up as a freelance taxpayer with the IRS, you merely start paying estimated taxes ( on Form 1040-ES, Estimated Tax for Individuals ) and charge Schedule C, Profit or Loss From Business, and Schedule SE, Self-Employment Tax, with your form 1040 tax return each April. You can get these forms from the IRS web site at www.irs.gov.
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As Your Business Grows
After completing the three basic steps described above, you may start providing services as an mugwump contractor. once you get started, you will be running a legitimate business .
As a small business owner, you should learn the basics of bookkeeping and recordkeeping, and you may besides want to take marketing steps, such as listing your clientele in the Yellow Pages and setting up a basic web site. For more information, see Nolo ‘s Business Accounting, Bookkeeping and Finance and Sales, Marketing & eCommerce areas .
For everything you need to know about being an mugwump contractor, get Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Gig Workers of All Types, by Stephen Fishman ( Nolo ) and remember you can purchase Independent Contract Agreement forms from our on-line storehouse .