How to Become an Independent Contractor

Commonly known as consultants, freelancers and self-employed, independent contractors are individuals hired to do a particular job, receiving payment only for work being done. Independent contractors are business owners, and are not their clients' employees. They do not receive employee benefits or the same legal protections as employees, and often responsible for their own expenses.

Start Your Business

Like all other small business owners, you will need to follow some essential steps to starting your business. Getting proper tax registrations, business and occupational licenses and permits from federal, state and local governments are necessary to operate legally.

As an independent contractor, you will also want to create a standard agreement for your services. The U.S. Chamber of Commerce provides a sample agreement. You can find a number of other sample agreements on the Internet, but it is best to consult an attorney to draft one up specifically for your business, since your agreement will be a legal document between you and your client. Here a few sample contracts:

Find Business Opportunities

Large and small businesses, organizations and government agencies hire independent contractors for a wide variety of jobs, from professionals such as accountants and engineers to trades such as construction and trucking.

These resources will help you connect with potential clients and locate opportunities:

• Job Referral Services
  Directory of websites allowing professional services and consultants to advertise their services and locate potential clients.
• Government Contracting Opportunities
  Find out how to bid on contracts of sorts, including professional and trade services with federal and state government agencies.

Operate Your Business

As an independent contractor you are responsible for paying your own taxes, Social Security, unemployment taxes, workers' compensation, health insurance, and other benefits. In addition, you and your client should understand the differences between an independent contractor and an employee as well as your legal rights and responsibilities.

Pay Your Taxes

Independent contractors must pay federal taxes on income and FICA; however, your client will not withhold taxes for you. As a business owner you will need to pay estimated taxes throughout the year instead of once a year on April 15th like employees.

The following IRS resources will help you understand how to pay federal taxes as an independent contractor:

• Self-Employed Individual Tax Center
  One-stop resource for federal tax information for all independent contractors.
  
• Federal Tax Forms for Sole Proprietors
  List of IRS forms frequently used by independent contractors.

Depending on the location of your business, you may be required to may state and local income and business taxes. Visit your state's tax agency to learn more about these requirements.

Are You an Employee or Independent Contractor?

Because you or your client call you an independent contractor doesn't mean that you one. There are legal requirements that classify workers into employees and independent contractors. Before starting your first job (or even or next one), it's important to become familiar with these distinctions.

As an independent contractor you do not have the same legal rights and protections as employees:

• You are paid for the work performed. Your clients are not required to paid them under the Fair Labor Standards Act (FLSA), including overtime and minimum wage
• You are not covered under your clients' workers' compensation benefits
• You are not entitled to receive your clients' employee benefits
• You are not covered under Equal Employment Opportunity laws as they apply to your client's relationship with its employees
• Your taxes are not withheld and paid by your client, including income, FICA and unemployment

If your client misclassifies you as an employee, they may be required by pay back taxes, and provide employee benefits, workers' compensation, unemployment, and more.

Just as your client should be very careful to distinguish between employees and contractors, so should you. If you feel you are being treated as an employee, complete Form SS-8 to ask the IRS to make a determination. If the IRS determines you are an employee, you should immediately contact an attorney. You may be able to file a lawsuit against the employer under FLSA, state unemployment or workers' compensation laws, and others.

More Information

In addition to federal tax and employment laws, you and your clients must comply with your state and local laws. Visit your state's small business guide to learn more about requirements in your state.