How to set up as an independent contractor in the United States

Are you outgrowing your office cubicle? Are you one of the United States’ many so-called “quiet quitters”? Or are you simply tired of the 9-to-5 drudgery, dreaming of the day when you can make a living on your own terms?

If so, going it alone as an independent contractor could be just the ticket. After all, the US isn’t known as the land of opportunity for nothing, and you’d be in strong company; since 2017, the number of contractors in the US has almost doubled. 

Before you jump on the self-employment bandwagon, though, you’ll need to understand how to:

• Register your business in the US

• Avoid misclassification as an employee

• Create compliant contracts that protect you

• Invoice and collect payments from around the world

In this article, we’ll cover all these things. We’ll also help you navigate your tax obligations as a self-employed worker, and discuss some of the other risks and liabilities you should be aware of.

So pour yourself a fresh coffee, and let’s dive in.

First, it’s important to clarify how the US defines independent contractors.

What is an independent contractor according to US law?

Independent contractors are workers who provide paid services (or products) to another party. However, they are classified differently to employees, and are usually not entitled to the same benefits, such as paid leave, sick days, and minimum wage. On the flip side, contractors have more freedom and flexibility in the way they work.

See also: Why businesses hire contractors vs. international employees

According to the Internal Revenue Service (IRS), the distinction between independent contractor and employee should be determined on a case-by-case basis. As a general rule, though, the defining factor is whether you, as a worker, are subject to the authority of the company you are working with. If you determine what work will be done — and how it will be done — then you are likely an independent contractor.

In general, you are also considered a contractor if you:

• Determine your own work schedule and location

• Work without direction or supervision

• Supply and use your own tools, materials, and equipment

• Are able to perform work for other companies simultaneously

• Set your own pay rate

• Are able to delegate or subcontract work

When you work with clients, it’s vital to be correctly classified to avoid penalties and fines.

Business registration in the United States

To begin working as an independent contractor in the US, you’ll first need to choose a legal structure for your business. This will dictate what your tax and legal obligations are.

Some of the most popular models include:

• Sole proprietorship: A simple structure that is ideal for independent, individual contractors. You have full control of the enterprise, although there is no legal separation between you (the owner) and the business; you are personally responsible for all its debts and liabilities.

• Partnership: A simple partnership agreement. Again, there is no legal separation between the individual and the business; you and your partners are personally responsible for any debts and liabilities. Alternatively, you can set up a Limited Liability Partnership (LLP) to help mitigate this risk.

• Limited Liability Company (LLC): A formal, legal entity that is separate from you, the individual. All income and losses are attributed to the company as opposed to you personally. There are also potential tax benefits if you incorporate a company.

There are pros and cons to each structure, but most independent contractors choose the sole proprietor model, as it is fairly simple to set up and operate. If you’re unsure, the Small Business Administration (SBA) has a detailed comparison guide to help you decide.

As a sole proprietor, the setup process is simple; you don’t need to register your business with any local, state, or federal authorities. However, you may need to acquire a business-specific license or permit, depending on what you do and where you’re based. Check with your local business administration authority, especially if you’re providing services or products that are subject to state or federal regulation.

Consider your business name, too. As a sole proprietor, you operate the business under your own name, but you may want to use an assumed name for marketing reasons. This is known as a “doing business as” (DBA) name. In most states, you need to register your DBA name separately, either with a county clerk or a state agency.

Finally, if you plan to hire employees, you will need a Federal Employer Identification Number (FEIN) for tax purposes. You can obtain this online or by filling out IRS Form SS-4 at your local IRS branch.  

How do I get paid as an independent contractor in the United States?

As an independent contractor, it’s down to you to handle your invoices and payment collection. Unfortunately, this means billing each client individually and collecting payment through their preferred payment method — which can be inefficient and time-consuming.

Some of the most common ways to collect payments include:

• Bank transfers

• Direct deposits

• Paper checks

• Money orders

• Virtual wallets

• Digital transfer services like PayPal and Wise

These methods all have their own pros and cons. For instance, bank and digital transfers can be pretty quick, but often come with hefty service fees. And if you have clients in other countries besides the US, the payment collection process can be even more complicated. 

Alternatively, you can use a trusted solution like Remote. Our platform is a simple, secure, and reliable way to get paid quickly in US dollars — and with no hidden fees. Learn more about how our platform can help.

Independent contractor taxes in the United States

As an independent contractor, you’re responsible for filing and paying your own taxes and social contributions.

As a sole proprietor, you pay personal income tax on your business profits, using IRS Form 1040. You do not have to fill out a separate tax return, or pay corporate tax.

You must pay federal income tax, which varies depending on how much you earn. Like most countries, the US has a progressive income tax rate of between 10% (for income up to $10,275) and 37% (for income over $539,901).

You may also need to pay state taxes, too, depending on where you are based. Some states have progressive tax rates, while others, such as Colorado, Illinois, and Michigan, charge flat rates. Some states — such as Texas, Nevada, and Florida — do not charge state income tax at all.

You must also pay self-employment tax, which is effectively your social insurance contributions. Unfortunately, as a self-employed worker, you are responsible for contributing both the employer and employee share. The current self-employment tax rate is 15.3% of your income, which consists of social security (12.4%) and Medicare (2.9%) contributions. Note that only the first $147,000 of your income is subject to social security contributions.

On the plus side, you can claim tax deductions for multiple business expenses, including:

• Business travel

• Rent and leasing costs for business premises

• Utility bills

• Advertising and marketing

• Business meals

• Insurance premiums

If you expect to owe more than $1,000 in tax, you must estimate and pay your taxes in advance throughout the year using IRS Form 1040-ES. Otherwise, you pay when you file your annual tax return on April 15.

VAT information for independent contractors in the US

There is no value added tax (VAT) system in the US. However, the federal government does charge excise taxes on certain products and services, such as machinery, alcohol, and tobacco. If you sell or provide such goods or services, you may have to file and pay excise taxes.

Liability considerations for independent contractors in the US

As a sole proprietor or freelancer, you are personally liable for finance and tax debts, which means your private assets can be forcibly used to settle your business debts. Many independent contractors purchase liability insurance to help mitigate this risk.

It’s also important to cover yourself when drafting and signing agreements with clients. Our legal experts can provide you with fully compliant contract templates, for both US-based and international clients.

Accounting requirements for independent contractors in the US

As a sole proprietor, you do not need to publish financial statements each year. However, it’s a good idea to keep organized records of your accounts — including all your client invoices and business purchases — to track your revenue and manage your taxes. A simple, single-entry accounting system should be sufficient.

You can either manage these records yourself using an accounting or bookkeeping tool, or hire a professional bookkeeper or accountant.

Contractor Management —

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We’re excited to share the details of our new tax compliance feature for Remote’s Contractor Management platform, specifically designed to help HR and finance administrators meet IRS rules. 

The dangers of contractor misclassification in the US

As we’ve mentioned, independent contractors are classified differently to employees in the US. Many of the protections and benefits employees enjoy do not typically apply to contractors.

As a result, companies may deliberately misclassify you to circumvent their legal obligations, while at other times, it may happen accidentally. Whether it’s intentional or not, misclassification can result in penalties and fines for both you and your client.

As an independent contractor, you can work with your clients to ensure this doesn’t happen. Discuss your role and responsibilities with them, and review the working arrangement regularly.

If your working relationship changes over time and you become more integrated into a client’s company, you can ask to be converted into an employee.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

Download

How do I ask the company I'm working with to convert me to an employee in the US?

Open a dialogue with your client and carefully discuss the risks and benefits of moving to an employer-employee relationship. In particular, be clear about how it can benefit both parties — not just you.

You can even suggest the help of a third-party solution, such as Remote, to ease the transition. Our global employment services help both parties stay compliant by taking care of key HR functions (like payroll management and benefits administration) in line with state and federal law.

4 ways Remote makes life easier for contractors and their clients

As you can see, there’s a lot to take on board when setting up as an independent contractor. Remote can help you with many of these challenges, allowing you to focus on growing your business and delivering to your clients. Here’s how:

1. International payments in countries around the world

Navigating all of your clients’ different invoicing, approvals, and payments systems can be complicated and time-consuming. And manual methods of invoicing and collecting payments can increase the risk of fees, errors, and delays.

Remote gives you access to a highly secure, streamlined dashboard that makes invoice management and international payments cost-effective and efficient. You can use our platform to get paid in US dollars hassle-free, without any hidden fees.

2. Localized in-app contracts and advice

When you draft agreements and contracts for your clients, you run the risk of non-compliance with local labor laws — especially when working with international clients. Remote offers localized contracts tailored to state and federal laws, ensuring that you stay compliant. Our legal experts can also provide guidance on complex issues, such as local classification and intellectual property protections.

3. Invoicing automation

With Remote, you no longer need to rely on spreadsheets and other manual tools to invoice for payments; we remove many of the inaccuracies and delays caused by archaic processes and manual management. Our platform lets you create invoices, submit them for approval, and subsequently get paid in your local currency without needing to switch to any other tool or software.

4. Tax management

Tax management is notoriously complex work. Remote helps you quickly and efficiently deal with tax management by compiling data about your income based on your invoices and payments received.

Set up as an independent contractor in the US today

Having the freedom and flexibility to work on your own terms is liberating. But your administrative responsibilities can distract from what you really want to be doing: helping your clients, delivering great work, and collecting invoices.

By using a stable, trusted platform like Remote, you can manage these obligations quickly and efficiently, allowing you to focus on your business goals. Specifically, we can help you:

• Avoid intermediary fees and delays with international client payments

• Draft compliant contracts for US-based and foreign clients

• Enhance your invoice management and avoid manual processes

• Comply with local labor laws regarding work practices

Our platform makes it quick, simple, and seamless to get started as an independent contractor. Learn more about how our expertise can save you time and resources today.