What You Need to Know as an Independent Contractor
You start earning money and suddenly realize you’ve got a legitimate business on your hands. You might think of yourself as a consultant, a freelancer or self-employed — someone who is hired to do a particular job and receives payment only for the work done. You’re an independent contractor.
You don’t receive employee benefits or work under the same legal protections as employees and often are responsible for your own expenses, but that magical word “independent” explains the lure.
You’ll have some basic business startup requirements to fulfill. After all, when you provide services and get paid, you need to comply with some government rules.
Many cities and counties require businesses — even single-owner, home-based operations — to register with the local tax collector to obtain a tax registration certificate, sometimes called a business license. These certificates are inexpensive, while penalties for operating without them can cost hundreds of dollars.
As an independent contractor, because you don’t have taxes — income, Social Security or Medicare — withheld from a paycheck, you have to handle all these taxes. You need to set aside enough money to pay your tax bill each year.
If your business is profitable, the IRS requires you to pay your taxes in four installments during the year via advance payments of your income and self-employment taxes, called estimated taxes. Actually, the bar is pretty low — if you bring in more than $3,000 in adjusted gross income from business activities in any year, plan on paying estimated taxes. Overall, if you make more than $400 per year, you must report business income to the IRS.
Setting yourself up as a self-employed taxpayer with the IRS starts by paying your estimated taxes using Form 1040-ES, Estimated Tax for Individuals, and by filing Schedule C, Profit or Loss from Business, and Schedule SE, Self-Employment Tax, with your Form 1040 tax return each April.
By being clever about deducting your expenses, you might not end up paying taxes on much income at all: Independent contractors can deduct many more expenses than employees, often lowering income for tax purposes by as much as 50 percent.
Besides taxes, you’ll have to think about health insurance and other benefits because clients are not required to pay them, according to the Fair Labor Standards Act, nor do they have to pay overtime or minimum wage.
At about this point, you may be wistful that there’ll be no more invitations to the company picnic, but you never know, you may be invited to several — for each of your clients. It’s a good idea to define your exact business relationship with your customers.
One of the most important decisions you will make as a small business owner is how to manage your accounting and bookkeeping. Do you do it yourself? Do you hire an employee? The bottom line is, you need an accurate picture of your company’s finances at all times. Many business owners find that they can outsource their accounting for less than it would cost to do the work themselves or to hire someone who may be less qualified.
Do yourself a favor and find someone who specializes in doing taxes for the Trucking Industry. They understand your business and can help you stay out of trouble, IF you follow their advise.