How to become an independent contractor in 6 simple steps

Although many freelance workers relish the freedom associated with working as independent contractors, some struggle to handle the extra responsibilities. 

There are a lot of work aspects you have to figure out when you become an independent contractor.

How does business licensing work? How do you handle your taxes? What’s a business entity, and why does the bank keep asking you if you’ve registered one?

This article answers all these questions and more by breaking down the process of how to become an independent contractor into six simple steps. We also explore the benefits and potential drawbacks of working as an independent contractor so you can make an informed decision about the direction in which to take your business.

Do you classify as an independent contractor?

It’s estimated that around 15% of all workers are independent contractors. However, many freelancers don’t know whether they’re considered a business — especially if they’re new to the freelance world.  

While there isn’t a standard “test” for independent contractor status, you can use the guidelines below to help determine which category you fall into.

What’s the difference between an independent contractor and an employee? 

The exact definition of employee vs. independent contractor will vary depending on where you’re based. A general rule of thumb, however, is that a permanent employee is a worker hired on a contractual basis, while an independent contractor is a self-employed worker hired to do a specific task or project.

If you’re an independent contractor, there is no legal permanent employment relationship between you and the business that hires you — even though you might continue to work together in the future.

It’s important to be clear about your employment status. If a company misclassifies an employee as a contractor, or vice versa, they can face heavy fines, harsh penalties, and even loss of intellectual property. 

The consequences of misclassification make many companies hesitant to work with independent contractors. 

Deep dive: The consequences of misclassifying employees as contractors

Are freelancers and gig workers independent contractors? 

Freelancers and gig workers are a subset of independent contractors.

Independent contractors are individuals who provide services to another entity under terms specified in a contract or within a specific project. They work across various industries and often have specialized skills or professions. These workers have the freedom to choose when and where to work but also bear the responsibility for their own taxes and benefits.

Freelancers typically work in creative, technical, or professional fields, such as writing, graphic design, programming, or consulting. They often manage multiple clients and projects simultaneously and may work through platforms that connect them with long- or short-term jobs.

Gig workers earn an income through on-demand, short-term jobs. These jobs are often facilitated by digital platforms or apps, such as those for rideshare drivers or local food delivery. Gig work is characterized by its flexibility and the lack of a long-term commitment to a single employer or client.

How independent workers differ

Here are the main differences between freelancers, gig workes, and other independent contractors:

Contracts

Independent contractors, in the traditional sense of the word, often engage with clients through more formalized contracts than freelancers, who might work on a project-by-project basis without long-term contracts. 

Gig workers, on the other hand, typically operate under the terms set by the platform they work for, with less negotiating power over the terms.

Services performed

Independent contractors and freelancers usually offer specialized services and might need professional qualifications or a high level of expertise. 

Gig workers, on the other hand, often perform tasks that require less specialized skills.

Autonomy 

All three independent worker categories operate with a degree of independence from traditional employment, but the level of autonomy varies. 

Independent contractors and freelancers have more control over their work, including their rates and clients. Gig workers’ autonomy, however, is often limited by the rules and algorithms of the platform they work for.

Licensing and certification requirements

Licensing and certification requirements vary by profession and state law. Some professions require independent contractors and freelancers to obtain specific licenses or certifications to offer their services legally. For example, electricians, plumbers, and therapists must meet state-specific licensing requirements.

Professions like freelance writers and graphic designers are usually not required to register or get licensed.

Gig workers, however, typically don’t need specialized licenses (beyond general requirements, such as a driver’s license if they’re a rideshare driver) unless their tasks fall under a regulated profession.

Given these differences, workers who fall into these categories should research the regulations in their specific state and professional field to make sure they are complying with the relevant labor laws. 

Pro tip: Check with your state’s Department of Labor for details on your chosen independent contractor profession.

How to become an independent contractor in 6 steps

Becoming an independent contractor can feel overwhelming, but it doesn’t have to be. Follow the six steps below, and you’ll be on the path to a rewarding and lucrative career.

Step 1: Decide on a business structure 

This step is less important when you first start out as an independent contractor, as long as you keep records of your transactions for future reference. 

When you start working as a contractor, you are a sole proprietor — the exclusive owner of your unregistered business. In a sole proprietorship, there is no legal distinction between you and your business entity, which means your business assets are considered personal assets.

What about business taxes? As a sole proprietor, you’re only responsible for paying income tax on your business profits each year, so you just need to file one tax return.

As you begin to take on more clients and work, you can choose to adopt one of the following business structures:

• One-person limited liability company (LLC): To form a one-person LLC, you need to be the only owner and worker in the business. You can’t have employees. And, because you need to register your business to form a one-person LLC, your personal assets and business assets are separated. In this case, you’re responsible for handling your business taxes separately from your personal taxes. 

• Incorporation: If you plan to hire employees or sell products (as opposed to providing a service), consider forming a corporation. Incorporating may involve selecting a board of directors to help you make important decisions about the business as it grows.

• Partnership: If you provide professional services, such as dentistry, law, or accounting, and you have the potential to work with another professional, consider forming a partnership. A partnership agreement means your profits, losses, and taxes will be shared between partners.

What happens if you don’t choose a business structure? 

Your business structure outlines the way you pay taxes and accept liabilities. If you don’t choose a specific business structure, you’ll be considered a sole proprietor as long as you work alone. 

If you hire employees or work with another professional without registering your business, you can face penalties and legal consequences. The nature of these consequences depends on the laws of the country you’re working from.

Step 2: Choose and register your business name

Now it’s time for the fun part — deciding on a name for your business. Choose a name that’s unlikely to change in the future to ensure consistency for your clients. It’s also good to choose a name that’s unique to your business. 

In most areas, you need to register with a fictitious business name if the business name doesn’t include your full legal name. To do this, you’ll need to file a fictitious name statement. Registering your business name will prevent other companies from using the same name.

What happens if I don’t choose or register a business name?

If your full name (as the legal owner of your business) is included in your business name (such as “Emma Eyre Accounting Services”), then you don’t need to register the name.

If you don’t use your legal name and fail to register your business name, you could face the following consequences: 

• You can’t enforce contracts signed under that name 

• Most banks won’t allow you to open an account under that name until it’s registered

• Someone else could register as a business using your business name 

Step 3: Get your tax registration certificate 

A tax registration certificate confirms your business is registered for tax purposes. Most cities require every business to register with the local tax collector. Some, however, only require registration if you earn above a certain amount each year.

More than 40% of independent workers expect continuous economic growth over the next five years. If you aren’t already registered to pay business taxes, it won’t be long before you’re earning enough to need a tax certificate.

What happens if I don’t get a tax registration certificate?

If you earn enough to be liable for business taxes and don’t have a tax registration certificate, you could face penalties and fines for operating a business without the appropriate documents. In some areas, it’s considered a misdemeanor to operate a business without a tax registration certificate.

Step 4: Obtain any required vocational licenses

Depending on the service you provide, you may need a professional or vocational license to operate your business legally. Licensing is essential for auto mechanics, real estate agents, electricians, hair stylists, and other professions.

To determine if you need a license to operate your intended business, ask your trade association or local government officials. 

What happens if I don’t obtain a vocational license?

If you operate your business without the appropriate vocational license, it can be considered fraudulent activity. Your local laws may force you to stop doing business. You also might have to deal with fines, penalties, or criminal charges. 

Step 5: Open a business bank account 

If you were employed full-time, your employer would handle estimated tax payments for you by withholding a certain percentage of your income each month. As an independent contractor, you handle these payments yourself. 

You’ll want to open a business bank account to make this process easier. Separating your business and personal finances helps you manage your finances, assess your business’s success, and pay the correct amount of tax. This is because you can keep transactions for your business income and expenses in one separate account.

Having a business checking account also helps establish your business’ credibility with clients, vendors, and suppliers.

What happens if I don’t open a business bank account?

If you don’t separate your business finances from your personal finances, taxes can get murky. Separating the two helps you avoid making calculation errors or missing tax payments.

If you miss a tax payment, you may have to pay penalties and interest on back taxes, costing you unnecessary income. 

Step 6: Set up to get paid

Once you’ve opened your business bank account, you can set yourself up to get paid quickly and easily. You’ll need a contract agreement template, an invoice template, and a payment mechanism for clients to pay you.

Remote makes it easy to manage payments as an independent contractor. You can use the platform to: 

• Submit invoices

• Create recurring invoices

• Log your business expenses

• Manage business and client documentation

• Localize client contract agreements to remain compliant

• Get paid in your local currency

The benefits of working as an independent contractor

In 2022, there were around 31.9 million people working as independent contractors in the United States alone. When you look at the benefits of freelance work, it isn’t difficult to understand why working for oneself is becoming increasingly popular.

Here are the main benefits of working as an independent contractor:

• Freedom and flexibility. According to 83% of freelancers, being your own boss is the best part of working as an independent contractor. You have the authority to set your own hours and can design your calendar to suit your lifestyle. 

• Greater variety of clients and projects. Independent contractors can be as selective about their work as they choose. You have the power to prioritize and focus on projects that excite you.

Pro tip: Using a contractor management platform like Remote helps independent contractors collaborate with clients around the world through a simple setup and payment process. Remote makes it easy for any independent contractor to get paid by both domestic and international clients.

• Improved work-life balance. Because you set your hours and choose the projects you take on, it’s easier to maintain a healthy work-life balance than working as an employee. And because you don’t have colleagues relying on you, you have greater flexibility when it comes to scheduling and taking time off. 

• Financial control of your business. As the owner of your business, you get to keep all the profits from your work. You also get to decide how much money you want to invest back in the business. 

• Lucrative career. Working as an independent contractor can be highly lucrative. As you gain experience, you are able to set higher fees and choose more profitable clients to boost your income. 

• Access to tax deductions. As an independent contractor you can claim tax deductions for business expenses, such as driving costs or depreciation on business purchases.

Potential drawbacks of working as an independent contractor

Before you make freelance work your main source of income, make an informed decision by having a realistic view of working as an independent contractor.

There are a number of valid concerns many people have before taking the plunge into freelance work. Fortunately, you can stay on top by being prepared for the below common concerns, and still create a career that works for you.

• More responsibility. If business goes badly, you bear the brunt of any losses. Still, it’s easy for you to monitor your finances and catch issues ahead of time because you’re the only person involved in each project. 

• No employee benefits. Benefits like health insurance are some of the main incentives of being a full-time employee. However, as an independent contractor you have complete control over how much you invest in these areas. 

• Liable for self-employment tax. Being liable for self-employment tax means you pay for your own social security, retirement, and things like Medicare taxes in the United States or National Insurance Contributions in the United Kingdom. However, this means you also have the opportunity to decide how much you want to invest in these areas. 

• Inconsistent income. When you start working as an independent contractor, your income can vary significantly from month to month. While this can be difficult to manage, you can still lead a lucrative career. This is because you have complete control over your rates, your clients, and the type of work you do. Over time, you can build a stable business even as an independent contractor.

How to pay taxes as an independent contractor in the US 

Paying taxes as an independent contractor in the US involves an understanding of the complex system of self-employment taxes, income taxes, and potentially other tax obligations. This, of course, depends on the nature of your work and where you operate.

Here’s an overview of how you should manage your tax responsibilities:

Understanding self-employment taxes

Independent contractors in the US must pay federal self-employment taxes. These cover Social Security and Medicare taxes. 

The current self-employment tax rate is 15.3% — 12.4% for Social Security on the first $160,200 of your taxable earnings (subject to annual adjustments) and 2.9% for Medicare (without an upper limit).

In addition to self-employment taxes, you are responsible for paying federal income tax based on your net earnings. The amount depends on your total income and applicable tax bracket.

Plus, you likely need to pay state income taxes.

Quarterly estimated tax payments

The IRS requires independent contractors to make estimated tax payments quarterly if they expect to owe $1,000 or more when they file their return. This system prevents large year-end tax bills and penalties for underpayment.

Use Form 1040-ES to calculate and pay your estimated taxes. This form helps determine how much to pay each quarter based on your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

Annual tax return filing

Independent contractors report their income and expenses on Schedule C, which is filed with their personal tax return (Form 1040). This determines their net income from their self-employment, which is subject to both income tax and self-employment tax.

You can also deduct business expenses, such as home office expenses, supplies, and travel, to reduce your taxable income. Plus, you may qualify for various tax credits that can lower your tax bill.

Considerations for older independent contractors (aged 65+)

If you’re an independent contractor over age 65, you’re in a category all by yourself. Consider how your work income affects your Social Security benefits and taxes. Income above a certain threshold may result in a portion of your Social Security benefits being taxable.

Those over age 72 with retirement accounts are also subject to Required Minimum Distributions (RMDs), which can affect their tax situation. So, if you’re working past retirement age, plan carefully to minimize the tax impact on your earnings.

Penalties for non-compliance

The IRS imposes penalties for late payments and underpayment of estimated taxes. These penalties vary based on the amount due and the length of time that amount remains unpaid.

There are also penalties for underreporting income due to negligence or the disregarding of rules. These penalties can be substantial, so staying compliant with your tax obligations is important if you’re an independent contractor in the US. 

These potential pitfalls mean it’s advisable for independent contractors, especially those new to self-employment or approaching retirement age, to consult with tax professionals. This will help make sure you are making the most of your deductions and meeting all tax requirements.

What about independent contractors in other countries?

Tax systems and obligations for independent contractors can be quite different in countries outside of the US. Some countries have simpler tax systems for freelancers, with flat rates for small businesses or special arrangements that encourage entrepreneurship.

In many countries, however, independent contractors must also navigate a Value-Added Tax (VAT) or Goods and Services Tax (GST) if their earnings exceed a certain threshold. This adds another layer of complexity to their tax obligations.

The moral of the story: though setting yourself up as an independent contractor is relatively easy, make sure you are informed and up-to-date on official regulations and your tax requirements.

Streamline your independent contractor journey with Remote

Working for yourself is not always easy, but it comes with the freedom and flexibility to manage your own business. You can reap the professional and financial rewards of your hard work and dedication as an independent contractor.

Remote’s Global HR Platform makes it easy for companies that hire independent contractors to onboard, manage, and pay these workers in 200+ countries. We do this through our Contractor Management Platform and Freelancer Hub.

We help businesses manage local laws, benefits, and tax compliance requirements to facilitate smooth global expansion. Plus, our integrated HR platform ensures an enjoyable experience for independent contractors working through Remote.

To find out more, read our full international contractor management guide on getting set up as a contractor, or book a demo to explore Remote’s full suite of global HR features.

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