Prepare to Become an Independent Contractor

More and more people are leaving behind the salaried comfort of traditional employment for the freedom of independent work. The appeal is tempting–you take all the credit and cash, work only the hours you want to, all while doing something you love and are good at. But before you dive headfirst into your first freelance gig, be sure to consider how changing your employment status will change your taxes.

How To Become An Independent Contractor image by @usacehq

When you apply for an open position at a company, hopefully they’ll call you in for an interview. And when you get offered the job, you fill out a new tax form, probably the the “W2”. You’re officially an employee. The company will pay half your taxes, give you insurance benefits, 401k matching, and you’re very own corn office equipped with all you need to succeed.

Rather than being trained to do a job within the company, you offer a service or product that could help move the company forward, so they hire you. You can do a job no one else in the company can, so there is no training involved. All tools needed to complete your job become your responsibility, but in return you don’t have scheduled hours. You get paid to complete the job, and that’s that. If this sounds like you, you’re an independent contractor. The company doesn’t cover taxes or benefits of any sort, so therefore you’re required to fill out the “1099” tax form.

The important differences between employees and independent contractors are the behaviors of the company and the type of business relationship created, plus what it means for youand your income reporting. Under the 1099 form, no taxes are withheld from your paychecks. You’ll see bigger numbers, but in the end you’ll end up paying morein taxes because you’ll need to pay the self-employment tax on top of the income tax.

You could possibly file taxes as a self-employed independent contractor, or a self-employed business owner. Knowing the difference and which title best suits you could prevent future headaches and dealings with IRS. Efile.com elegantly explains that “if you control the type of work you do and the result of the work done, you are a self-employed business owner. Generally, you are considered an independent contractor if the person or organization that pays you has the right to direct and control only the result of the work and not what work will be done nor how it will be done.”

The fun part of working independently is the chance to work with many different businesses and gain a wide range of experience. Once the job you were paid to do is done, your business relationship (legally) ends. But the point of freelancing is to grow your clientele and get repeat business. Even though companies won’t pay benefits to contractors, they will probably hire you again and again if you produce honest, quality work.