how to become an independent contractor

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How to Become an Independent Contractor

how to become an independent contractor

For years, I have been an independent contractor. I’ve grown my home business into something that earns a steady income for my family. In fact, I’m the primary breadwinner. Becoming an independent contractor is one of the most profitable small businesses to start this year.

As an independent contractor, I have a degree of freedom in choosing my own schedule, and even determining who my clients are. I’m also part of a segment of the workforce that is growing in demand. Many companies are turning to independent contractors because it can be less expensive. My hourly rate might be higher than the rates commanded by “regular” workers, but I save a company in other ways:

  • No benefits to pay
  • No overhead costs
  • No payroll taxes to pay

A few years ago, CNN Money pointed out that an employee working for $14 an hour actually costs an employer $20 an hour. While most of my clients pay more than $20 for a project, the reality is that they just have to pay me for the project, rather than continue to pay me day in and day out, and pay the other costs associated with maintaining a full-time employee.

How Do You Become Self-Employed?

The independent contractor arrangement can be a win-win in many ways. If you are looking to become an independent contractor, either to replace your “day job,” or just to make a little extra money on the side, here are some steps you need to take:

1. Think of a Name for Your Self-Employed Business

Consider what services you will offer, and then pick a name that describes what you do. I call my business Miranda Marquit Freelancing. It’s straightforward, and you know — immediately — what is done and who is offering the services. If you want to offer graphic design or web development services, think of ways to include those descriptors in your business name.

Have a solid understanding of who you are and what you have to offer, and be able to clearly define what you do. I’m still tweaking my “elevator pitch,” but it’s coming along nicely. When you can encapsulate what you do, it’s easier to convince potential clients to hire you.

2. Choose a Self-Employed Business Structure and Get a Proper License

Next, think about how you want your business organized. My business is set up as a Limited Liability Company (LLC). I’m the general partner and my husband is the limited partner. Others, though, find that an S-Corp or C-Corp makes more sense for them. (Here’s a comparison of using LLC versus C-Corp.)

In some cases, it can even make sense to remain a sole proprietorship for a time. Consult an accountant or tax professional for more information about what might be most appropriate for you.

You should also get a proper business license. Your state or locality likely requires you to have a license, even if you are providing independent contractor services out of your own home. If you plan to have a LLC, LLP, or S-Corp., you definitely need a license. However, there are cases in which sole proprietors need licenses, too. Check the requirements, and make sure you abide by them.

3. Open a Business Bank Account

Even sole proprietors should keep business expenses separate from personal expenses. Open a business bank account to keep everything separate, and to improve your ability to keep good records. Many of the best checking account providers for consumers also have business accounts you can use.

This is a critical step that many new independent contractors miss. You must separate your personal money from your business money. If you are self-employed and someone sues you, and your money isn’t kept separately, then everything you have can be pulled into the lawsuit. Even if your new independent contracting business just made $200 this year and you have $50,000 in the bank together with that money, it can all be targeted in a lawsuit.

You need to keep good records so that you are prepared come tax time. Make sure that you are setting aside some money in your business bank account to help you pay quarterly taxes. Don’t forget that you will have to pay your portion of payroll taxes, as well as the employer portion. This is known as the self-employment tax. Organize your finances now so that you can avoid headaches later.

4. Advertise Your Independent Contractor Services

Finally, you need to get out there with your business. Let others know what you are doing, and how you can help them with the services you provide.

It helps to have a home on the web, so set up a web site. You can even write a blog. Post your resume and relevant samples online.

Use social media to promote your services and to connect to others. (Social media is one of the key ways you can advertise your self-employed services while still saving money for your small business.) If you are generous in the way you promote others, and if you offer insightful information and ideas, eventually potential clients will notice — and hire you.

The benefits of being an independent contractor

Independent contracting comes with plenty of benefits, but it’s not all sunshine and rainbows. So what does it offer?

An independent contractor having a discussion with their current employer

A different way of working

Businesses around the world are moving to more flexible employment methods in order to cut costs. Cloud computing is a driving force behind this change, and it’s benefiting a particular type of worker – the contractor.

Contractors are people who work on a contract basis, not as regular employees. Each contract might span a few months, a few weeks or even a one-off piece of work. Contractors often go from one company to another in a short space of time, or work part-time for two or more companies simultaneously.

It might sound like an insecure life for the contractor, but knowing that your skills are in demand by more than one company can actually make you feel more secure.

There’s a lot to think about before deciding whether the life of a self-employed contractor would suit you. Here are some important points to consider:

The definition of an independent contractor

As a general guide, you will be considered to be a contractor instead of an employee if you:

  • own at least part of your own business
  • work for multiple companies during each tax year
  • have specialized skills or expertise
  • work on a temporary, short assignment or project
  • work for a client for a limited period of time and not on a permanent basis
  • supply most of your own materials and equipment
  • have a client who makes the ultimate decisions about the project you’re working on

Check local rules for a clearer picture, as the guidelines vary from one country to another.

The benefits of becoming a contractor

There are a number of advantages to being a contractor.

Be your own boss

Contract work provides greater independence and, for many people, a greater perceived level of job security than traditional employment.

Maintain a good work/life balance

Less commuting, fewer meetings, less office politics – and you can work the hours that suit you and your lifestyle best.

Earn more money

Being a contractor means you get paid for every hour of work you do, at the market rate. If your skills are in demand, your income could be high.

Test out a new field of expertise

Not sure if there’s a market for your skills? You can dip a toe into a new industry without committing yourself to a full-time job. If it doesn’t work out, you can cut your losses quickly and easily.

Start on a part-time basis

This can be appealing to young people just graduating from college, or older people who want to experiment with a second or even third career.

Test out a company

If you’re not sure a new company is offering the right full-time employment opportunity for you, suggest first working for them as an independent contractor.

If these benefits sound appealing, you might have the right mindset and skills to become a contractor.

Plan what you will earn

Contractors often start as employees first, before leaving to work on their own. They have a good knowledge of the rates being paid and the type of work expected of them. If you’re not sure what you can charge, have a look at sites such as Upwork for rates and other information.

Remember, you’ll only be paid for the work you do. You usually won’t be paid when you’re sick or taking time off. There will be no company pension or retirement plan, no corporate healthcare package and no dental coverage.

But some people are able to do high-value work in a short space of time. Even taking into account loss of holiday pay, sick pay and other benefits, such workers can still come out ahead financially as contractors.

How far ahead? Think about what you could charge per hour or per job. Then think about how much work you’re likely to get. Now research the cost of providing your own healthcare insurance, sickness and time off coverage, retirement plan, equipment and so on.

Take these numbers and put them into your accounting software to forecast your likely income. Do the figures add up? Only by planning carefully will you know whether it’s time to strike out alone. It may be helpful to talk to a financial advisor before making the final decision.

Balance the benefits with the downsides

There are some disadvantages to being a self-employed contractor. Perhaps the biggest is employment rights – in most countries, you won’t have the same legal rights as a regular employee. Here are some things to consider when you’re a contractor:

Only paid for the work you do

You’ll have no income during temporary lulls in workload. This can be stressful, so you’ll need to budget carefully.

You won’t have employment benefits

Your client doesn’t have to provide you with health benefits or even (in some countries) pay you the minimum wage.

You may not be covered by Workers Compensation or similar schemes

It may seem unfair, but you may not be treated on an equal footing with other workers.

The Outsider label

You won’t belong to the organization you happen to be contracting for. They don’t have to invite you to company meetings or involve you in strategy discussions or planning. And some full-time employees may resent you if they think you’re earning more than them.

You may not be covered under equal opportunity employment laws

This varies from one country to another – some governments apply the same legislation to contractors, but many don’t.

Taxes are not withheld and paid by your client

This means that if you don’t put money aside for your year-end tax bills, you could get into trouble. Use good quality accounting software to keep track of tax owed and the contents of your savings accounts.

Be aware that if your client incorrectly classifies you as an employee, they may be required to pay back taxes and provide employee benefits. That will cause problems for you and your client, so it’s important to get it right.

How you get started

If you’re ready to become an independent contractor, here are some practical steps to get you started:

  • Set up your business: Check out our guide on starting a business for tips on getting registered, choosing a business structure, budgeting and more.
  • Write a business plan: Be sure to include things such as your rates, expenses and expected growth. Seriously consider hiring an accountant at this stage so that you can create a plan that’s realistic and professional.
  • Separate personal and business banking:This makes it much easier to manage your accounts.
  • Obtain insurance: Professional indemnity and public liability are usually the important ones. Find out more about small business insurance.
  • Choose good quality accounting software: Use it to track expenses, send out invoices and reduce your end-of-year tax work.

It’s also a good idea to have your own standard contract, NDA (non-disclosure agreement) and services agreement for your clients to sign. Be aware that some clients may prefer to use their own documentation.

Five ways to find contract work

There are several ways of finding contract work.

  • Specialized websites: Companies post projects for individuals to bid for on sites such as Upwork
  • Government-run procurement sites: Mainly for public sector projects, these can be useful for finding contract work – governments require several steps for you to become a supplier
  • Social media sites, especially LinkedIn: Use your connections to learn what businesses are looking for – and bid when they announce invitations to tender
  • Your contacts: Reach out to your friends and see if they know of anyone who needs assistance at their companies
  • Other contractors: Your skills might be complementary to theirs, allowing you to form a loose consortium of contractors who can refer work to each other

If what you make or do can be delivered online or by mail, you can broaden your search to other countries. Good accounting software will make it easy to invoice in different currencies.

Use cloud technology to help you

When you become an independent contractor, suddenly all the things that were done for you – such as administration, accounts and marketing are now your responsibility. Fortunately, there are tools to help reduce the workload. You’ll need the following:

  • Simple project management and time-tracker software: This will help you track your work by time and project, so you don’t under- or over-charge
  • Good accounting package: Be sure to get this right, as it can form the backbone of your business
  • Good to-do list tool: Nobody else will manage your time for you, so you’ll have to do it yourself
  • Word processing, spreadsheet and presentation software: Online collaborative office software suites are often free to use for small businesses, and can save you time and expense
  • Marketing suite of apps: Whether it’s creating and maintaining your website or managing your social media presence, there are apps available to help you publicize your contractor business

Ideally, these tools should all be cloud-based so you can access your data anywhere, anytime and on any device.

Being your own boss can be rewarding

Contract work involves responsibility, drive, the ability to act on your own, commitment and initiative. You may also have to cope with a solitary working environment at times, or insecurity about where the next job is going to come from.

But with the right skills and attitude, being a self-employed contractor can be liberating and empowering. It’s likely you’ll have more freedom than you ever had in your previous working life. And with the cloud-based software applications available today, becoming a contractor is easier now than ever.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

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