How do You Become an Independent Contractor?
The Great Resignation of 2021 has seen a large shift in workers’ attitude toward employment. It has prompted many Americans to leave their W2 wage-earning jobs in favor of striking out on their own as independent contractors (ICs), enjoying all the flexibility that come with being self-employed. If you’re one of those workers who is considering taking such a step, this post will try to answer the most frequently asked questions about what is involved in becoming an IC.
The first and most important step is to make certain that you really qualify as an Independent Contractor. Any organization that would engage your services as a contractor will surely be checking to make sure you’re legitimately classified as an IC. To be an IC in the eyes of the IRS you must be in business for yourself (more about what that involves below). You must work for your clients according to your own schedule (not the same schedule as their full-time, onsite workforce). You must also have more than one client, driving more than one revenue stream. If you only work with one client, it can be much easier for the IRS to classify you as a W2 worker and NOT an IC. Here’s some guidance from the IRS and self-test you can perform to determine if you’re able to classify as an IC.
Once you’ve determined that you’re eligible to operate as an independent contractor, there are a number of prudent steps you should take to prepare yourself to be in business. To set yourself up as a business, it is useful to write a detailed business plan that clearly explains the type of services you offer and to whom. This will help you attract and retain customers that align with your offerings.
Choose a name for your business. Think about what kind of services you intend to offer and then select a name that reflects your services. Also, explore whether the type of work you do may subject you to liability. If it does, you may be well-served by forming a corporation (like a simple S-corp or a limited liability corp LLC). Most ICs are sole proprietors who own their business and its assets. But if you’re exposed to potential liability, an LLC structure can help shield your business and assets from potential legal action/litigation. In either case, you’ll be required to provide to any new clients, either your Social Security number (if a sole proprietor) or an employer identification number (EIN) if you incorporate. If you don’t the client will be legally required to withhold 28% of your earnings for the IRS.
Next, it is important to separate your personal bank accounts from business activity. Opening a separate business bank account for your IC business is essential. This helps with tax reporting, managing expenses, tracking tax write offs and so forth. It is also a good practice to obtain some level of insurance to protect your business from claims. Experts recommend using a good quality accounting software to help keep track of your income and expenses. Remember, as your own boss, you’ll be in charge of reporting your own income and tax reporting as an IC. Good software and separate bank accounts helps keep finances organized and helps ensure you stay compliant with IRS requirements.
If you’re a Gig worker using online platforms like Uber, Lyft, Upwork, Fiverr, Taskrabbit and others, you’ll be required by these platforms to be an IC. Their contracts almost always have a provision that requires you to agree to accept IC status. So, be aware of this when utilizing those Gig platforms.
The last step in becoming a successful Independent Contractor is going out there and getting customers. You can advertise wherever it makes sense to do so or join online communities of ICs. You can also connect with staffing companies that help connect employers with IC resources.