Working as an Independent Contractor
An independent contractor is someone who works for themself, in a trade, business, or profession, offering services to individuals or businesses. This person is not an employee. Working for others as an independent contractor has benefits and drawbacks.
The benefits:
You can build a portfolio of clients or customers, and that way even if you lose one or two of them, you’ll still have other clients to fall back on. You get to set your own hours. You get all of the profits of the business. You don’t have to share them with anyone. You can decide how much money you take out of the business. You can take deductions for expenses that are not deductible to you as an individual like driving expenses, home business expenses, and depreciation on business purchases.
The drawbacks:
If you take all of the profits, you also have to take all of the losses. You’ll have to find and purchase your own health insurance. Your income may end up being seasonal or inconsistent. The self-employment tax means you’ll have to pay all of your own Social Security and Medicare taxes.
Decide on Your Business Structure
If you are just starting out, you don’t have to decide what type of business it is. You can just start taking in money and paying your business bills. Just make sure you keep detailed records of your transactions. When you file the first income tax return for your business, you will most likely want to file as a sole proprietor, in which case your business income will be on a Schedule C form that you can include on your personal tax return. Going forward, the type of legal structure that works best for your business depends on a variety of factors.
Limited Liability Company
If you’re the only owner and you have no employees, you might want to consider forming a one-person limited liability company (LLC).
Incorporating
If you sell products or plan to hire employees, you might want to consider incorporating, or forming a corporation.
Partnership
You might want to set up a partnership if you are working in professional practice like dentistry, law, or accounting.
Apply for a Tax ID Number and Other Tax Registrations
You should apply for a federal income tax ID number for your business, called an Employer ID Number or EIN. This number, provided by the IRS, is a unique number for your business for tax purposes.
State Tax Registrations
If you sell taxable products and services in a state that charges sales tax, you will need to register with your state for state sales tax purposes. If your state has income taxes, you may also need to register with your state’s tax agency for state income tax purposes.
Register Your Business Name
When you have selected a business name, hold off on buying business cards and stationery for a bit. You should register your business name in your state, but first search your state’s business records division to see if anyone else has registered that name. As a sole proprietor, you may also need to file a fictitious name statement with your city or county if your business name is different from your legal name. For example, if your name is Carlotta Calvin and your business name is The Carlotta Calvin Company, you probably won’t need a fictitious name filing, but if it’s Excelsior Solutions, you will.
Open Your Business Checking Account
Getting a business checking account helps establish your credibility with vendors and suppliers. It also helps you keep your business and personal transactions separate to make it easier to see how your business is doing, to create your business tax return at tax time, and keep your personal finances separate from your business finances.
Set up Your Business Record Keeping System
If you want to claim business tax deductions for your business expenses on your business tax return, you will need to keep good records. Here’s a simple system you can use: First, set up a point-of-sale system and accounting software so you can capture the information from each business transaction. Then, check periodically to make sure you have all the information on each transaction and that it’s complete and correct. Record all transactions in your accounting system at least once a week. Consolidate and review all the information, using financial reports, like a profit and loss statement and balance sheet.
