How to set up as an independent contractor in the United States

Are you outgrowing your office cubicle? Are you tired of the 9-to-5 drudgery? Are you dreaming of the day you can make a living on your terms, maybe even from the comfort of your couch?

If so, setting up as an independent contractor could be just the ticket. After all, the US isn’t known as the land of opportunity for nothing. You’d also be in strong company; since 2017, the number of contractors in the US has almost doubled. Freelancers will make up about 50% of the workforce in the next few years.

However, before you jump on the self-employment bandwagon, you must understand how to:

• Register your business in the US

• Avoid misclassification as an employee

• Create compliant contracts that protect you and your clients

• Invoice and collect payments from around the world

In this article, we’ll cover all this and more. Learn how to navigate your tax obligations as a self-employed worker and the other risks and liabilities you should be aware of.

So pour a cup of fresh coffee, and let’s dive in.

First, it’s important to clarify how the US defines independent contractors.

What is an independent contractor according to US law?

Independent contractors provide paid services (or products) to another party. However, they are classified differently from employees and are usually not entitled to the same benefits, such as paid leave, sick days, and minimum wage. On the flip side, contractors have more freedom and flexibility in their work.

See also: Why businesses hire contractors vs. international employees

The Internal Revenue Service (IRS) states that the distinction between independent contractors and employees should be determined case-by-case. As a general rule, though, the defining factor is whether you, as a worker, are subject to the authority of the company you are working with. If you determine what work will be done — and how it will be done — then you are likely an independent contractor.

In general, you are also considered a contractor if you:

• Determine your own work schedule and location

• Work without direction or supervision

• Supply and use your own tools, materials, and equipment

• Are able to perform work for other companies simultaneously

• Set your own pay rate

• Can delegate or subcontract work

A good rule of thumb is: You are an independent contractor if you control your work product (and not the company you work with).

When you work with clients, it’s vital to be correctly classified to avoid penalties and fines.

How to register as an independent contractor in the US

To begin working as an independent contractor in the US, you’ll first need to choose a legal structure for your business. This will dictate what your tax and legal obligations are.

See also: A guide to visas and work permits in the US

Some of the most popular models include:

Sole proprietorship

A sole proprietorship is a simple structure ideal for independent, individual contractors. You have full control of the enterprise, although there is no legal separation between you (the owner) and the business; you are personally responsible for all its debts and liabilities.

Partnership

A simple partnership agreement is another option. Again, there is no legal separation between the individual and the business; you and your partners are personally responsible for any debts and liabilities. Alternatively, you can set up a limited liability partnership (LLP) to help mitigate this risk.

Limited liability company (LLC)

An LLC is a formal, legal entity separate from you, the individual. All income and losses are attributed to the company as opposed to you personally. There are also potential tax benefits if you incorporate a company.

Each structure has its pros and cons, but most independent contractors choose the sole proprietor model, as it is fairly simple to set up and operate. If you’re unsure, the Small Business Administration (SBA) has a detailed comparison guide to help you decide.

As a sole proprietor, the setup process is simple; you don’t need to register your business with any local, state, or federal authorities. However, you may need to acquire a business-specific license or permit, depending on what you do and where you’re based. Check with your local business administration authority, especially if you’re providing services or products that are subject to state or federal regulation.

Consider your business name, too. As a sole proprietor, you operate the business under your own name, but you may want to use an assumed name for marketing reasons. This is known as a “doing business as” (DBA) name. In most states, you need to register your DBA name separately, either with a county clerk or a state agency.

Finally, if you plan to hire employees, you will need a Federal Employer Identification Number (FEIN) for tax purposes. You can obtain this online or by filling out IRS Form SS-4 at your local IRS branch.

If you opt for a partnership or LLC, you may also need to register with state agencies.

This step is necessary if you intend to complete any business activities like:

• Maintaining a physical presence for your business.

• Conducting in-person meetings within the state.

• Anticipating a significant portion of business revenue will come from the state.

• Hiring employees to work in the state.

Now let’s look at how you can expect to be paid.

How do I get paid as an independent contractor in the United States?

As an independent contractor, you’re responsible for handling invoices and collecting payments. Unfortunately, this means billing each client individually and collecting payment through their preferred payment method, which can be inefficient and time-consuming.

Some of the most common ways to collect payments include:

• Bank transfers

• Direct deposits

• Paper checks

• Money orders

• Virtual wallets

• Digital transfer services like PayPal and Wise

These methods all have their own pros and cons. For instance, bank and digital transfers are quick but often come with hefty service fees. However, while paper checks don’t include fees, it may take longer for you to receive your funds.

If you have clients in countries other than the US, the payment collection process can be even more complicated.

Alternatively, you can use a trusted solution like Remote. Our platform is a simple, secure, and reliable way for independent contractors to get paid quickly in US dollars with no hidden fees. Learn more about how Remote can help.

Independent contractor taxes in the United States

As an independent contractor, you’re responsible for filing and paying your own taxes and social contributions.

As a sole proprietor, you pay personal income tax on your business profits, using IRS Form 1040. You do not have to fill out a separate tax return, or pay corporate tax.

You must pay federal income tax, which varies depending on your income. Like most countries, the US has a progressive income tax rate of between 10% (for income up to $10,275) and 37% (for income over $539,901).

You may also need to pay state taxes, too, depending on where you are based. Some states have progressive tax rates, while others, such as Colorado, Illinois, and Michigan, charge flat rates. Some states, including Texas, Nevada, and Florida, don’t charge state income tax at all.

You must also pay self-employment tax, which is effectively your social insurance contributions. Unfortunately, as a self-employed worker, you are responsible for contributing both the employer and employee share.

The current self-employment tax rate is 15.3% of your income, which consists of social security (12.4%) and Medicare (2.9%) contributions. Only the first $147,000 of your income is subject to social security contributions.

On the plus side, you can claim tax deductions for multiple business expenses, including:

• Business travel

• Rent and leasing costs for business premises

• Utility bills

• Advertising and marketing

• Business meals

• Insurance premiums

If you expect to owe more than $1,000 in tax, you must estimate and pay your taxes in advance throughout the year using IRS Form 1040-ES. Otherwise, you pay when you file your annual tax return on April 15.

VAT information for independent contractors in the US

There is no value-added tax (VAT) system in the US.

However, the federal government does charge excise taxes on certain products and services. These include sales of machinery, alcohol, tobacco, gasoline, airline tickets, and tires. Excise taxes are independent of income taxes and must be reported separately.

If you sell or provide such goods or services, you may have to file and pay excise taxes.

Liability considerations for independent contractors in the US

As a sole proprietor or freelancer, you are personally liable for finance and tax debts, which means your private assets can be forcibly used to settle your business debts. Many independent contractors purchase liability insurance to help mitigate this risk.

It’s also important to cover yourself when drafting and signing agreements with clients.

It’s critical to draft and maintain compliant, written contracts with your clients.

Here’s what to include, at a minimum:

• The full names and relationships between the parties.

• The nature of the agreement, including the product or service deliverable.

• The timelines and deadline for project completion.

• The terms of payment.

• The details regarding contract termination.

• The process regarding a breach of contract, disagreement, or dispute.

• The IP rights and ownership of the completed product.

• An NDA for contractors.

• The signatures and date of the agreement.

Why not ensure your contracts cover all the bases? Remote’s legal experts can provide you with fully compliant contract templates, for both US-based and international clients.

Accounting requirements for independent contractors in the US

As a sole proprietor, you do not need to publish financial statements each year. However, keeping organized records of your accounts — including all your client invoices and business purchases — is a good idea to track your revenue and manage your taxes. A simple, single-entry accounting system should be sufficient.

You can manage these records yourself using an accounting or bookkeeping tool, or hire a professional bookkeeper or accountant.

If you work within a partnership or LLC, you have a few more considerations, including some accounting changes.

For example, it’s essential to set up business accounts separate from your personal accounts.

You can opt for a cash-basis accounting system, where you don’t add the cash until it’s received and don’t deduct your expenses until paid. Or you can select the accrual-basis accounting system, where you record income/expenses when a transaction occurs, regardless of actual payment.

No matter the system, remember to maintain accurate financial records for IRS purposes, including potential audits.

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The dangers of contractor misclassification in the US

As mentioned, independent contractors are classified differently than employees in the US. Many protections and benefits employees enjoy do not typically apply to contractors.

Companies may deliberately misclassify you to circumvent their legal obligations. For example, if a company issues demands based on how, when, or where you work, they are starting to treat you more like an employee.

Misclassification may also happen accidentally. The above company may not realize that the more that the more it controls your work, the more it treats you like an employee.

Whether intentional or not, misclassification can result in penalties and fines for you and your clients.

Misclassification has other costs, too. It can cost the worker a fair wage, overtime, and the protections that come from the local labor and employment laws. Social insurance systems take a hit, too, as they don’t receive the accurate and appropriate funds.

As an independent contractor, you can work with your clients to ensure this doesn’t happen. Discuss your role and responsibilities with them, and review the working arrangement regularly.

If your working relationship changes over time and you become more integrated into a client’s company, you can ask them to convert you into an employee.

Use our Contractor Compliance Checklist to avoid misclassification

Work through this checklist to help determine if a new hire should have a contractor or employee relationship.

Download

How do I ask the company I’m working with to convert me to an employee in the US?

Open a dialogue with your client and carefully discuss the risks and benefits of moving to an employer-employee relationship.

In particular, be clear about how it can benefit your employer. Here’s how:

• Employees show increased loyalty to their companies, as they don’t work for anyone else.

• Employees demonstrate stronger connections and engagement, as they have opportunities to work with consistent colleagues, teams, and management.

• Employers enjoy the decreased costs associated with recruiting, hiring, onboarding, and training new hires more frequently.

You can even suggest using a third-party solution, such as Remote, to ease the transition from contractor to employee. Our global employment services help both parties stay compliant by handling key HR functions (like payroll management and benefits administration) in accordance with state and federal law.

6 additional considerations to make when becoming an independent contractor in the USA

Before embarking on your freelance career, take these factors into consideration.

1. Responsible for health insurance

Self-employed workers are responsible for finding and purchasing medical, dental, and vision insurance. While it might be tempting to forego insurance, you risk the high costs of healthcare and accruing substantial debt if an accident or emergency does happen.

2. Responsible for retirement plans

Independent contractors also need to consider how they will fund their retirements. Since you are not an employee, you won’t be eligible for employer-funded 401k or contributions to other retirement systems.

3. Any time off is on your dime

Independent contractors enjoy a significant amount of freedom when it comes to when and how they work. The downside is that you must account for your own leave time. You’re not eligible for company-sponsored paid time off for vacation, family emergencies, sick leave, etc.

4. No protection under local labor laws

Independent contractors aren’t covered under labor and employment laws. Since you negotiate your terms, you can’t claim overtime if you approach critical deadlines. If the worst happens, you won’t be eligible for workers’ compensation or access to unemployment.

5. No access to other company perks

Employees often enjoy access to other bonuses, like stock options, depending on the company. Some employers offer professional development funds, access to professional certifications, or sponsored attendance at industry conferences.

Still others may provide fitness or lifestyle incentives, such as access to decreased insurance deductibles based on activity levels or childcare services.

6. Greater tax burden

As an independent contractor, you bear the complete tax burden. As there is no employer contribution for Social Security and Medicare, you’re responsible for both.

You must also adhere to IRS tax timelines, including quarterly payments.

If you’ve considered these factors, and are ready to move forward, here’s how Remote can help.

5 ways Remote makes life easier for contractors and their clients

As you can see, there’s a lot to take on board when setting up as an independent contractor. Remote can help you with many of these challenges, allowing you to focus on growing your business and delivering to your clients. Here’s how.

1. International payments in countries around the world

Navigating your clients’ different invoicing, approvals, and payment systems can be complicated and time-consuming. Manual methods of invoicing and collecting payments can increase the risk of fees, errors, and delays.

Remote gives you access to a highly secure, streamlined dashboard that makes invoice management and international payments cost-effective and efficient. Our platform makes getting paid in US dollars hassle-free, without any hidden fees. Remote also provides guidance for how to pay international contractors.

2. Localized in-app contracts and advice

Drafting agreements and contracts for your clients can result in non-compliance with local labor laws, especially when working with international clients.

Remote offers localized contracts tailored to state and federal laws, ensuring that you stay compliant. Our legal experts can also provide guidance on complex issues, such as local classification and intellectual property protections.

3. Invoicing automation

With Remote, you no longer need to rely on spreadsheets and other manual tools to invoice for payments. We remove many of the inaccuracies and delays caused by archaic processes and manual management.

With Remote, you can create invoices, submit them for approval, and get paid in your local currency without switching to any other tool or software.

4. Tax management

Tax management is notoriously complex work. Remote helps you quickly and efficiently deal with tax management by compiling data about your income based on your invoices and payments received.

5. Job board

Head to Remote’s job board, whether you want to post a job or browse the currently available postings. We connect contractors with clients worldwide, all within one handy platform.

Set up as an independent contractor in the US today

Having the freedom and flexibility to work on your own terms is liberating. However, it’s easy to let the administrative responsibilities distract you from what you really want to do: help your clients, deliver great work, and collect invoices.

A stable, trusted platform like Remote helps you manage these obligations quickly and efficiently, allowing you to focus on your primary business goals.

Specifically, we can help you:

• Onboard new clients easily and efficiently

• Avoid intermediary fees and delays with international client payments

• Draft compliant contracts for US-based and foreign clients

• Enhance your invoice management and avoid manual processes

• Comply with local labor laws regarding work practices

• Receive timely payments in your preferred currency

Our platform makes it quick, simple, and seamless to get started as an independent contractor. Learn more about how our expertise can save you precious time, energy, and resources today.