Now is a great time to try getting into business for yourself. No, that does not mean that you have to sell an amazing product. All it means is that you can make money as an independent contractor. When people hear that word, the first thing that typically comes to mind is being a freelancer, but there is a difference though the two terms are used interchangeably. When you are an independent contractor, it means you are not an employee. You pay your own taxes as a business owner.
Being an independent contractor also means you work on a project-by-project basis. One easy way to find out if you are an independent contractor is if you are not on a payroll and you signed a contract. Those are tell-tale signs that you may be an independent contractor, regardless of if you have a legal business entity or not.
The main thing that separates an independent contractor from an employee is your employer, or the person who hired you for a particular project, is not required to pay your health insurance, life insurance, give your bonuses, stock options, worker’s compensation, unemployment taxes, payroll taxes or any 401(k) contributions. If being your own boss, setting your own hours and having autonomy over your work wounds like something you want to try, here are some of our tips for growing your wealth as an independent contractor.
What is your business legal type?
Do not freak out. This is not a completely necessary first step. If you are just starting out as an independent contractor, all you need to do is start working. The money you take in should be used to pay your business bills. Just make sure you are keeping track of all your transactions. Come tax time, you will have everything you need to file your first income tax return.
Keep in mind that when you are filing for your income tax returns, you will file as a sole proprietor. Any income your business receives will be included on a Schedule C form which you will include on your personal tax return.
Another option is to file your business under a specific legal type. For instance, if you are the only employee in your business you can file for a limited liability company. On the other hand if you are thinking of selling a product or hiring people, it would be best if you formed a corporation. You could also set up a partnership if you are working in a professional practice like law, dentistry or accounting.
Get your taxes in order
Make sure you get your taxes in order if you want to continue growing your wealth as an independent contractor. It is highly recommended you apply for a federal tax ID number. With this number given to you by the IRS, you will be better established as a business entity. You put this number on any tax documents which helps you differentiate between you as a individual and your business.
Make sure you have all your taxes in order. The type of taxes you pay depends on the type of business you are and the products or services you sell. You will likely need to register with your state for sales tax purposes. If your business owns property, you will likely have to pay property taxes. You will have to pay self-employment taxes on your income which include things like social security and medicare. Another thing to consider is state taxes on your business income. This could be things like gross receipt taxes or franchise taxes. Lastly, if you have employees, you will have to pay employment taxes.
Register your business name
Before you go off buying all your business paraphernalia like stationary and business cards, you first need to make sure no one else as your business name. If your name is totally unique to you, register the name with your state. You could also trademark your name. If your business’ name is different than the name of your company, you will have to file a trade name or a doing-business-as name statement.
Get a business bank account
You do not want to lump your business bank account with your personal bank account, even if you are the only employee. Having the separate accounts further solidifies the difference between you as an individual and the company you run. It will also make you seem more legitimate, letting people know you are serious about your business. You look good to vendors and suppliers not to mention it helps keep your business and personal expenses separate. All of this makes filing taxes much easier. Send a trusted vendor a sample invoice and you will be getting paid in no time.
Keep track of your records
Keeping great records of all your spending for your business is the best way to ensure you are taking out the proper deductions. You want to make sure you establish a good record keeping system so that everything is organized. With both income and expenses there needs to be an easy way to capture information on each business transaction. This could mean adopting book keeping software or implementing a point-of-sale system.
You want to be sure all the information input into the system is accurate. As far as transactions, you should be recording all of those transactions at least on a weekly basis. You also want to combine and take a look at all the information entered. You can use financial reports to do this step. By keeping great track of your records, you can better track your profits and losses. That means you can make more informed decisions as it pertains to your business. You know when to invest or when to cut back spending.
Know what you can deduct
If you are doing your own taxes, you need to know the things you can deduct. You are allowed to deduct 50 percent of self-employment tax. This reasoning is because the IRS considers the employer part of the self-employment tax to be a deductible expense. You can also deduct health insurance premiums, out-of-pocket medical expenses like doctor visit copays and the cost of prescriptions.
You can also deduct your car if you use it solely for business. Let us say that you work out of your home office as a sole proprietor. You can deduct some of your housing expenses against your business income.
Things to keep in mind
In order for you to be paid, you will have to create an invoice. That invoice should include payment details like the payment terms and how to pay. Getting paid and tracking down who owes you money for services performed is up to you since you are not an employee.
Since you are an employee, no one can legally train you, tell you when to work, direct their tasks, set specified hours or dictate how and when your work should be completed. If they are doing that, the IRS may see you as en employee and the company can get dinged for missclassifying you on their taxes. That is a form of tax evasion, which is against the law.
When you own a business that hires employees, you have to withhold, deposit, report and pay into their payroll taxes. You do not want to get caught misclassifying someone because you could get into serious tax trouble if you do so.
Conclusion
Being an independent contractor can be very rewarding. You are truly independent. You are able to run your business just the way you see fit. You do not have to answer to anyone. You also receive all of the profits. Since it is just you there is no need to share it with anyone. You can also decide when and how much money you take out of the business. You can also take out deductions that you normally would not be able to as an individual filing taxes.
Working for yourself has its advantages, but it also has some disadvantages. When you take all the profits you are also responsible for all the losses. That means if you lose money, you cannot blame anyone but yourself. If the business did not make any money, you have to do some serious self-reflection to figure out what you did wrong or what is not working. You will also have to pay for some things on your own. There are not any taxes withheld from your paycheck, so you will be responsible for paying your own taxes.
Now is a great time than ever to go into business for yourself. Though it has some drawbacks, working as an independent contractor can be very fulfilling. You have complete autonomy over your work. You can pick the hours you want to work. You can also pick how you want to work.
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