Becoming an Independent Contractor

Starting Your Business

Independent contractor at work
Photo: Kelvin Murray/Getty Images

If you want to work as an independent contractor, you'll want to determine your business structure, get all the tax registrations you may need, open your business checking account, and set up a record keeping system.

Key Takeaways

  • An independent contractor is a business owner, not an employee.
  • You may want to set up your business as a specific legal entity, like a limited liability company (LLC) or partnership.
  • You’ll want to get a federal business tax ID number and register your business name with your state.  
  • To set up your financial system, you’ll need a business checking account and business accounting software.

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).


If you sell products or plan to hire employees, you might want to consider incorporating, or forming a corporation.


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. 


You may not need to get an EIN if you don’t have employees or aren’t a corporation, partnership, or LLC. But most banks require this ID to open a business account. It also helps establish you as a business entity.

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. 


If your business name is unique, and you have a distinctive logo to go with it, you may want to consider trademarking the name with the U.S. Patent and Trademark Office.  

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.


You may want to get an accounting app to better manage bookkeeping and tax calculations for your business.

Frequently Asked Questions

What is the difference between being self-employed and being an independent contractor?

Independent contractors are self-employed. You are classified as self-employed if you are in business for yourself, even if you are in a partnership or run your business part-time. 

How do independent contractors pay taxes?

Independent contractors pay income taxes based on their business type. For example, an independent contractor working alone might be registered as a sole proprietor or a single-owner limited liability company (LLC), and they would file a Schedule C. If the independent contractor is a partner in a partnership, they would pay taxes based on their share of the partnership’s income on a Schedule K-1. In both cases, the business tax income is included on their personal tax return.

Is it better to be an employee or an independent contractor?

Each status has benefits and drawbacks. Employees generally have to do what their employer tells them to do, but they don’t have to take on the risk of running a business. Independent contractors typically have clients instead of an employer, and they can keep all the income they make from their work, but they have to handle all of their own taxes, business deductions, health insurance, and take on the risks that come with running a business.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. IRS. "Do You Need an EIN?"

Related Articles