What Is an Independent Contractor?

An independent contractor is essentially a trained professional who works in their own time. In basic terms, you are considered self-employed. You may be hired by someone to do a job, but how you go about completing the task is typically determined by you.

What Is a Ubiquitous Form 1099?

Form 1099 comes in various versions, depending on the payment type. It can be required of you if you paid someone $600 or more during the tax year.

Does an Independent Contractor Need a Business License?

While some states require all businesses to have a license, others may require it depending on what kind of work you do. A health professional, for example, would need to finish any licensing requirements in order to work in the state.

What Is a Business License?

In simple terms, it is a tax receipt given by the city. A contractor could operate their business by paying a low fee to the city they choose to work in. However, some cities and counties may not have a business license, but require you to obtain a permit to conduct business. A business license may be required if you conduct your business from home as well.

How Do I Get a Business License?

If you would like to run your business from home, you may need to check with your city or county to see if licensing a home business is allowed. An independent contractor can obtain a business license by researching how business is done in the city they wish to operate in. You may need to check with the chamber of commerce, city clerk, zoning and planning department, or other local office to see which one maintains business licenses.

What Happens if I Don't Get a Business License?

You may be penalized for operating your business without the proper licensing.

Minimum Requirements for Working as an Independent Contractor

There are three things you should do as an independent contractor:

  • Choose a Business Name: Having a business name to put on receipts and business cards will make you look more professional than using your own name. Your business name may or may not have to be registered with the government. If you wish to use another name besides the official business name, then you will have to register a DBA. However, if you plan on using your own name in the business name, there's no need to register it.
  • Obtain a Tax Registration Certificate: There are many places where registering with the local tax collector is required. The tax registration certificate is also known as a business license, but it's simply proof you have paid the tax to operate officially in the city. If you decide to operate without the certificate, you may be fined with penalties that are more costly than the actual license. A vocational license may be required if you are a licensed auto mechanic, barber, or real estate agent.
  • Pay Self-Employment and Estimated Income Taxes: As an independent contractor, you may need to set some money aside to pay for your taxes each year. You must report to the IRS if you make more than $400 in a given year.

How to Set up an Independent Contractor Business

  • Get a Business Checking Account: This will help the IRS see that you and the business entity are separate. You can use this account to pay for any expenses your business accumulates and to put in the money you make from your jobs.
  • Create a Simple Business Recordkeeping System: Keep track of all profits and expenses that happen within the business. This can help later when it's time to pay your taxes. You should also set up a budget to get your business going, which will help you see how the business grows each month.

How to Register With the IRS as an Independent Contractor

If you are self-employed, you can start with Form 1040-ES (Estimated Tax for Individuals), and then file the other necessary forms with your 1040 Form during the tax season.

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