Compliance Tips for Independent Contractors

With the current recession, an increasing number of Americans are becoming independent contractors. For many, this path is a very attractive option. However, as you embark on your new career path, understand that certain state and federal regulatory requirements will now apply to you: regulations that did not necessarily apply during your tenure as an employee.

When you become an independent contractor, you become a small-business owner. You are responsible for paying your own taxes, benefits, health insurance, and so forth. In order to make a living, you will need to market yourself and your business, seek and secure job contracts, and enter into contractual agreements with new and repeat clients.

Below are the regulatory steps and other things you will need to consider as you launch your small business venture as an independent contractor:

Regulatory Guidelines

Step 1: Business Entity. Choose your business name, and register the name with your local government. In some states, if you are operating a for-profit business under a name other than your given name, you must file a Fictitious Name Statement (“Doing Business As”) within the county where your business is located.

Step 2: Business Structure. Do your research on the various business structures available. Available types include Sole Proprietor, S-Corp, LLC, and so forth. Make sure you choose a structure that keeps your personal assets separate from your business. Also, note that your chosen business structure largely determines how your business income will be taxed. If you are uncertain as to which structure best suits your business model, seek the appropriate legal counsel.

Step 3: Tax Identification Number. Most businesses are required to obtain an Employer Identification Number (EIN) from the U.S. Internal Revenue Service (IRS). An EIN, also referred to as a federal tax identification number, is used to identify a business entity. You can obtain an EIN online by visiting www.irs.gov.

Step 4: Business Licenses and Permits. Most businesses require some type of license or permit in order to legally operate. Visit your county’s website, and determine what licenses are required for you to get your business up and running.

Step 5: Paying Taxes. Since you are an independent contractor rather than a W-2 employee, you are responsible for paying your own state and federal income taxes. Rather than paying on April 15th like an employee, you will need to pay estimated taxes throughout the course of the year. The estimated tax due dates are currently: April 15th, June 15th, September 15th, and January 15th of the following year.

Depending on the structure of your business, you may have to pay Self-Employment (SE) Tax. Any sole proprietor, partnership, or limited liability company (structured as a partnership) that nets more than $400 or more per year is required to pay SE tax. SE tax contributes to Social Security and Medicare programs within the Federal Social Security tax system, and is a requirement for all individuals who work for themselves.

Paying estimated taxes can be a difficult adjustment for many new business owners. If it helps, consider setting aside tax payments on a weekly or monthly basis into a separate bank account. When the next deadline approaches, withdraw these funds to make your estimated tax payment.

Hiring Workers

As an independent contractor and small-business owner, at some point you may need to hire some help. When this scenario presents itself, note that additional state and federal regulatory requirements will apply to both your business and new workers. For more information on regulatory compliance requirements for employers, visit Hiring New Workers: 10 Regulatory Compliance Steps.

Things to Consider

Independent contractors do not have the same legal rights and protections as employees. As an independent contractor and small business owner, keep the following points in mind as you are working with and seeking new clients:

• Your clients do not withhold taxes of any kind from your pay.
• Your clients are not required to pay you benefits, overtime, or minimum wage, as mandated by The Fair Labor Standards Act (FLSA). You are only paid for the work that you perform.
• You are not covered by any of your client’s benefits including health coverage, vacation pay, 401(k), etc.
• You are not covered under your client’s worker’s compensation program.
• The Equal Opportunity Employment laws that apply to your client’s employees do not cover you.

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