How Do I Become an Independent Contractor? 5-Step Guide

If you’re a business owner who provides services to others, you’re generally considered to be an independent contractor.¹ In 2022, there were already 31.9 million independent contractors in the US. ²

As the shift to remote working continues, you may also be wondering, “how do I become an independent contractor?”

This article lays out the five steps to becoming an independent contractor. It also answers some FAQs along the way.

How Do I Become an Independent Contractor? 5 Steps to Success

If you work for yourself, you’re classified as an independent contractor. Perhaps you offer carpentry services, online digital marketing consultancy or copywriting services.

Regardless of your trade, you need to follow certain steps to work legally. Unlike an employee, independent contractors are responsible for everything related to their business. From earning licenses to paying taxes, the buck stops with you.

Here’s a breakdown of the five steps to success as an independent contractor.

Choose & Register Your Business Name

Your journey as an independent contractor begins by choosing your business’s name. It should reflect the services you offer and values you hold.

You’ll need to check that your business’s name isn’t already taken in your state.

Once you’ve decided on the name, you’ll need to register it.³

You can register your business with an entity name, which protects it at the state level. States have different rules about how you can and can’t name your business.

Alternatively, you can have your name trademarked. This protects it and your business’s products at the federal level. Just be sure to check that your business’s name and product names aren’t already trademarked. You’ll need to go through the United States Patent and Trademark Office’s database to do this.

You’ll also likely want to register for a Doing Business As (DBA) name. A DBA name allows you to operate under a name different from your personal name and formal business name. Numerous businesses can operate under the same DBA. This gives you more flexibility when choosing a name. Just keep in mind that trademark infringement laws still apply when selecting a DBA name.

You’ll also need a DBA when applying for a business bank account, so having one will help you in multiple ways.

Once you’ve selected a DBA and formal business entity name, you’ll want to ensure that you create a domain name. This is for your business’s website.

You’ll want to create a name that reflects your brand and also caters to search engine optimization (SEO). There’s no requirement for your domain name to match your business name. Once you’ve registered a domain name, it’ll be protected.

Apply for a Federal Income Tax ID Number

You should apply for an Employer Identification Number (EIN). Your EIN is your federal tax ID number and acts like your business’s social security number (SSN). It enables the Internal Revenue Service (IRS) to easily identify you for tax purposes.

You’ll need an EIN to open a business bank account, as well as to pay federal taxes, hire employees and apply for business licenses.⁴

While independent contractors aren’t always required to have an EIN, it can make your business run smoother.

If you already have an EIN from a previous business, you may still need to apply for a new one, depending on how your new business has changed.

You may also need to apply for a state tax ID number, depending on the rules and regulations of your state.

Get the Required Business License

Most businesses, big or small, need certain permits and licenses. There are both federal and state licensing requirements.

If your business activity or industry is regulated by a federal agency, you’ll need to apply for a federal license. The requirements and fees for the license vary depending on the federal agency.

Here are some common industries and their corresponding federal agencies:

• Agriculture—U.S. Department of Agriculture
• Alcoholic beverages—Alcohol and Tobacco Tax and Trade Bureau or Local Alcohol Beverage Control Board
• Aviation—Federal Aviation Administration
• Firearms, ammunition, and explosives—Bureau of Alcohol, Tobacco, Firearms and Explosives
• Fish and wildlife—U.S. Fish and Wildlife Service
• Commercial fisheries—National Oceanic and Atmospheric Administration Fisheries Service
• Maritime transportation—Federal Maritime Commission
• Mining and drilling—Bureau of Safety and Environmental Enforcement
• Nuclear energy—U.S. Nuclear Regulatory Commission
• Radio and television broadcasting—Federal Communications Commission
• Transportation and logistics—U.S. Department of Transportation⁵

You’ll also need to apply for state licenses. These vary depending on your industry, location and state. States tend to regulate a wider range of industries.

Keep in mind that you’ll have to renew certain licenses at regular intervals. So make sure to keep a note of the renewal date.

Open a Business Account

Once you’ve got your EIN and business’s name, you can apply for a business bank account.

Opening a business bank account is a solid option for making your financial management easier. It enables you to separate your personal and business expenditure and income. This makes your life far easier when it comes to filing your tax returns.

You’ll also be able to access business loans and credit cards. These can help your business to build its credit score through responsible usage.

If your business account has merchant account functionality, you’ll be able to accept card transactions. This can help attract customers and promote a professional image.

There are many great business account options for independent contractors.

Prepare to File Taxes as an Independent Contractor

With a business bank account, you’ll thank yourself when tax season comes around. As an independent contractor, you’re fully responsible for filing your tax returns.

Depending on the structure of your business and the state you’re based in, the taxes you’ll have to pay can vary.

Here are some of the most common business taxes you may be liable to pay:

• Self-employment tax
• Employer tax
• Income tax
• Estimated tax
• Excise tax⁶

You may have to pay state and local taxes in addition to federal taxes.

When completing your tax return, you’ll also be able to choose whether your tax year runs with the calendar year or fiscal year. If you have certain accounting needs, it may make more sense for the tax year to align with your fiscal year.

Can a Non-US Citizen be an Independent Contractor?

Non-US citizens are able to work as independent contractors. However, they’ll need to apply for an Individual Taxpayer Identification Number (ITIN) in place of their SSN.⁷

Non-US citizen independent contractors will need to file Form W-9 in place of the Form I-9, and keep it on record. Your clients will also need to file Form 1099 if they pay you $600 or more.

Just make sure that the nature of your work actually classifies you as an independent contractor rather than an employee. Misclassification can result in legal consequences for both you and your employer.

Discover Wise Business: The Stress-Free Business Account

If you’re setting yourself up as an independent contractor, a Wise Business account could help you in the process.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. It’s easy to register and open an account 100% online. There are no monthly fees or minimum balance requirements, that you’ll often find with bank accounts. Features such as this save time and money, which independent contractors will certainly appreciate.

The Wise Business account holds more than 40 currencies, all in one place. You can also get major local account details for a one-time fee, allowing you to receive international payments like a local.

You can connect your Wise Business account to QuickBooks, FreshBooks, Wave and Xero. That way, you’ll save time on manual entry and make your life simple come tax season.

And if you need to send a payment abroad, you’ll have it converted at the mid-market exchange rate, with no hidden fees.

Open a Wise Business account online

Sources:

Sources checked February 2024.