How to Become an Independent Contractor
Think about being able to choose your own hours, make your own schedule, and work around your own needs. These are just a few of the many benefits of becoming a self-employed, independent contractor.
Whether you’re currently an employee looking to take a new direction or maybe a student looking to kick start your career, deciding to become an independent contractor can mark the beginning of a new chapter in your life! However, it’s important to note that the transition to self-employment is a significant one and comes with a lot of work that you will need to consider.
Leaving your current job situation, such as a full-time job, is only the first of many steps along a path toward working as an independent contractor, which is often referred to as a 1099 independent contractor in the United States – 1099 is the tax form used by self-employed Americans without employees.
To make it on your own, you’ll have to:
- Register your independent business
- Learn how to manage your finances
- Keep strong records
- File taxes as a business owner
If you are considering a career in the gig economy on apps such as Uber or Lyft, you are also considered an independent contractor. While you may not need to follow all the requirements as someone with a physical business would, you will still need to think and manage your income taxes like one. Knowing what to expect ahead of time will make the transition a smooth one.
Though it may seem complicated and overwhelming at first, working as a 1099 independent contractor is mostly a matter of dedicating the necessary time upfront, following a few easy steps, and establishing a few new habits. Here’s how to become an independent contractor!
Why become self-employed?
There’s a lot of reasons why people love being self-employed. First and foremost, they get to be their own boss, which means no more office politics, no more worrying about job security, and no more having others control their work and livelihood.
As a result, independent contractors tend to enjoy a much better work-life balance.
Furthermore, when you work in an organization your achievements can sometimes go unnoticed or unrewarded, but when you’re self-employed, there is a direct benefit to going the extra mile or taking on extra work.
Based on a study about the well-being and job content of self-employed and employed professionals, it was shown that those who are self-employed are more engaged in their work and enjoy more freedom to innovate. Perhaps that is why those who get to be their own boss are usually happier with their overall work-lives.
Another great benefit of becoming an independent contractor is more often than not, you have more control over your earning potentials. You can often set your own prices or hours, which is why freelancers and independent contracts tend to earn more than their fully-employed counterparts.
If you work on gig apps, you have full control over which tasks to take on while getting an estimate of how much you can earn with each job. Many gig workers will work on multiple apps at once to diversify their income and make more money. This also gives you a good opportunity to learn which gig apps you prefer and fit your lifestyle the best.
A few things to consider first
Before you quit your day job and begin your new life as an independent contractor, it’s important to reflect on your goals, obstacles, and opportunities. Think about how you’re going to make ends meet without a consistent salary, whether you’re ready to manage a fluctuating income, and if you’re prepared to manage your own independent business.
Becoming self-employed isn’t for everyone and it’s important to take a step back to make sure you’re ready to become self-employed before you consider how to become self-employed.
You don’t need to know everything about how to become an independent contractor before you begin, but you often need a passion for your work and a willingness to learn.
If you’re wondering, “should I become self-employed?” here are a few questions to ask yourself first:
- Am I organized enough to run my own business?
- Can I manage with a fluctuating or inconsistent income?
- Am I motivated and passionate about the type of work I do?
- Am I willing to put in the extra work to learn what I need to know to be successful?
- Am I ready to manage the paperwork, tax requirements and learn how to work as a 1099 contractor or independent business owner in my state?
If you answer yes to all of the above, you just might be ready to begin your journey as an independent contractor!
Getting into Gear
Once you’ve taken the necessary time to establish that self-employment is the right path for you, the next question is, “what do you need to do to become self-employed?”
The first step is making sure you have all the tools and equipment that will be necessary to provide the product or service of your choice. After all, you no longer have an employer to supply you with the equipment you need to get the job done.
Let’s say you want to become a rideshare driver on Uber or Lyft, you will need to ensure your vehicle meets the requirements. Not only that, but you will need to have at least one year of licensed driving experience along with valid insurance for your vehicle. Check out our articles about becoming an Uber driver or Lyft driver to better understand what the requirements are!
On the other hand, if you’re interested in selling handmade goods or opening an e-commerce store, it’s important to ensure you have the supplies and materials needed to maintain inventory and processing for shipping.
For freelance service providers, you’ll need to ensure your home office has everything you need to be successful. Now is the time to consider investing in a new computer or upgrading your internet service if you need the extra bandwidth.
Picking a Business Name
If you are considering launching an independent business, you may want to consider giving it a proper, official-sounding name. This is mostly applicable for freelancers or those starting business from the ground up, whereas gig workers on gig apps will be fine without registering a proper business name.
For example, if you’re a freelance designer, you can get creative and start branding yourself with a business name. While many independent contractors use their name plus the service they’re providing — such as John Smith Landscaping or Joan Smith Designs — there are some benefits to having a business name that doesn’t include your own.
Not only will you look more professional by building a brand for yourself, but contracts signed under a non-registered business name are harder to enforce and could cause potential legal trouble down the road. Banks may also be unwilling to open a business account unless they are given proof that the business has been properly registered.
In most instances, American contractors can register their original business name with the county clerk, though some states require them to register with a state office instead. It’s important to do your research to understand what the requirements are where you live.
Most contractors can continue paying federal taxes using their social security number on their tax filings but will need to register for an Employer Identification Number (EIN) with the IRS if you wish to hire staff in the future. Some banks may also require independent contractors to register for an EIN to open a business bank account, even if they don’t actually hire staff.
Most gig workers and freelancers fall under the sole proprietor designation, which also allows them to file their personal income and business taxes together as a single entity, rather than filing for both independently.
One of the most important elements of transitioning from a full-time job to self-employment is strong record keeping. These records are important for several reasons, but their primary purpose is taxes. Knowing how much you’ve spent and how much you’ve earned will help you not only pay your taxes accurately, but ensure you’re not missing out on any deductions.
Once you become an independent contractor, there is a range of goods and services that qualify as business expenses and can be written off against your taxes at the end of the year. For example, those who use a bike to deliver food for delivery apps can write off the cost of that bike or any related costs, like repairs and maintenance, against their income.
Remember that you can only write off items that you can prove you purchased, so it’s important to keep strong records and transaction receipts for business-related expenses.
Strong income records can also give you an overview of your business operations. For example, last year’s income records may help anticipate slower or busier periods in the upcoming year or help you set personal goals and targets based on historical data.
Keeping track of your independent business’s expenses and earnings is relatively easy, and can be done with a simple word or excel sheet, or through an online accounting software. In fact, many of these software tools are available for free and are often geared specifically towards independent business owners. If you don’t know where to start, we have an article with the best self-employed apps for the modern-day gig worker!
While there are a lot of steps involved at the outset, becoming an independent contractor offers a lot of long-term benefits. If you’re interested in learning more about the gig economy, check out our Ultimate Guide to Working in the Gig Economy, and be sure to sign up for our newsletters to stay up-to-date with new content!