The Keys to Staying Within the Law as an Independent Contractor

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rules for working as an independent contractor

…And the Law Won

It’s a common story: In order to generate some extra cash, an employee creates a sideline business doing freelance work. She takes on one assignment, then another and another, until suddenly her freelance income is more than salary.

In this way, lots of solopreneurs start out more or less by accident.

Anytime that you get paid for providing a service, you must comply with rules…

Before you know it, a sideline can become a booming business, and without having really planned your path, you find yourself on the road to a successful career as an independent contractor. But first you need to fulfill some basic legal and financial requirements.

Anytime that you get paid for providing a service, you must comply with rules and regulations enforced by the government, even if you only work a few hours a week. Neglecting your legal responsibilities is a risky gamble.

And if the IRS comes knocking, or if a customer takes legal action against you, then you’re going to have a tough time protecting yourself from steep fines and penalties.

Protecting Yourself and Your Business

There are several simple steps that you can take to protect your business (and yourself) when you are starting out as a independent contractor.

First, choose a business name and register it with your state government.

Next, file an application for a tax registration certificate. Depending on the nature of your business, you may be able to use your social security number as a tax ID for your business. If your profession requires that you obtain a vocational certificate or license, then apply for one immediately, before accepting any contracts.

Most cities and counties require new businesses to register as a taxable organization. This tax registration certificate is sometimes called a business license, but it is essentially a document to prove that you have paid for the privilege of earning income in a certain city, county, or state.

If you earning income as a barber, therapist, masseuse, auto mechanic, accountant, or real estate agent, then you probably need to apply for a professional license. Visit your state government’s website or contact a local trade organization to find out if you need a particular license or certificate in order to operate legally.

A professional license is a legal necessity, but it can also help protect you from a frivolous charge of malpractice, negligence, or incompetence.

Paying Estimated Taxes

Finally, make sure to pay your estimated taxes quarterly. To set yourself up as an independent contractor with the IRS, simply begin to pay estimated taxes with a Form 1040-ES.

If you’re considering skipping your estimated taxes and hiding income from the IRS, don’t do it! Penalties and interest on back taxes, especially self-employment taxes, can be very high, and by making legitimate deductions you can significantly reduce your tax burden—independent contractors are eligible for many more deductions than employees.

Once you complete these basic steps, you can safely begin earning income as an independent contractor. Good luck, and be sure to tell us your story in the comments section below!

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