This guide outlines the essential steps to establish yourself as an independent contractor, from choosing a business structure to managing taxes and benefits.
Who is this article for?
Individuals who are starting as independent contractors or starting their own business (e.g., consultants, temporaty ops support, freelance writers, IT professionals, etc.).
An independent contractor can be a sole proprietor, a freelancer with an incorporated business, a professional with a Limited Liability Partnership, or a corporation. The “independent” in the independent contractor defines the contractor as a non-employee and independent of the company where they’re doing contracted work.
Before becoming an independent contractor, ensure you are fully aware of your financial responsibilities and liabilities. You will be responsible for paying your taxes and acquiring your health care benefits. You will also be personally responsible for any liabilities, such as legal action that may be taken against your work or actions.
1. Decide on a business structure
You are not required to create a business structure. You can operate under your personal name and tax identification number. But, be aware that operating a business in this manner offers no legal protection for your personal assets. There will be no legal separation of your personal and work assets.
If you decide to create a legal entity, register or file documentation accordingly. If you decide to use a name other than your own, you will want to choose a name for your business before registering.
Options for legal entities:
- Sole Proprietor and How to Register
- Single Member LLC and How to Register
- What’s the difference between the two?
2. Determine your business name and register
If you decide to use a name other than your personal name you may need to register it.
- Entity name protects you at a state level
- Trademark protects you at a federal level
- Doing business as (DBA) doesn’t give legal protection, but it might be legally required
- Domain name protects your business website address
3. Apply for any business or vocational licenses
Depending on which state and industry you're working in, there are different laws for what types of licenses or permits you may need to operate.
The Small Business Association’s list of Business Licenses and Permits can be used to find which licenses and permits you may need to do business in the USA.
4. Open a business bank account
It is best to keep your business and personal finances separate, even if you decide not to set up a separate legal entity. Keeping the funds separate can be helpful when filing taxes and tracking expenses. If you are planning to deduct multiple business expenses from your taxes or work for multiple organizations, it is highly recommended that you use a separate bank account from your personal account (basically, the more business-related transaction you have monthly, the more you may need a separate account).
For example, if you set up a separate legal entity in the USA, you can open a business bank account once you’ve gotten your Federal EIN. This will ensure your personal and work expesnes are not co-mingled, making it easier to track your work and complete taxes when they are due.
5. Track earnings and expenses
- Earnings
- Losses
- Expenses - travel mileage, home office space, office supplies, and educational expenses are just a few.
- For the USA the full list of possible expenses you can write off at IRS guidelines for business expenses.
These items can be tracked on a spreadsheet or using accounting software like Quickbooks or Xero. Accounting software may make filing taxes, collecting payments, or paying invoices easier.
6. Benefits
While you have more flexibility and freedom as a benefit, you no longer have traditional full-time employee benefits.
Health insurance
- In the USA, you may be able to join a plan as a dependent or receive a free/discounted plan through HealthCare.gov.
- In the UK you pay into National Insurance.
7. Professional Insurance
Independent contractors should consider several types of professional insurance to protect themselves and their business:
The top two to consider are:
- Professional Liability Insurance (Errors & Omissions): Protects you if clients claim your work caused them financial harm due to mistakes or negligence. Essential for consultants, designers, and service providers.
- Cyber Liability Insurance: Important if you handle sensitive client data or operate primarily online. Covers costs associated with data breaches or cyber attacks.
You may also want to consider:
- General Liability Insurance: Covers third-party bodily injury, property damage, or personal injury claims that may occur during your business operations.
- Business Property Insurance: Protects your equipment, tools, and office space from damage or theft.
Insurance needs vary by industry, client requirements, and risk exposure. Many clients may require certain coverage types before contracting with you. Shop around for policies designed specifically for independent contractors in your field, and consider working with an insurance broker who specializes in small business coverage.
8. Taxes
It’s essential you know and follow the tax requirements for your type of business entity. You are responsible for your taxes, social security, and medicare contributions as an independent contractor.
Taxes can get confusing; it’s recommended you consult a tax professional or utilize a tool like:
9. Create proper client contracts
Every independent contractor relationship should be formalized with a written contract to protect both parties. A well-drafted contract:
- Clearly defines project scope, deliverables, and deadlines
- Establishes payment terms, rates, and invoicing procedures
- Outlines intellectual property rights and ownership of work
- Sets expectations for communication and reporting
- Includes provisions for termination and dispute resolution
Using standardized contracts for each client helps professionalize your services and prevents misunderstandings. Consider consulting with a legal professional to create a template contract that complies with relevant laws in your jurisdiction (here is a sample US template, but you will likely want to be state-specfic in the US), or use reputable online legal templates designed for independent contractors in your industry.
Remember that verbal agreements are difficult to enforce - always get the terms in writing before beginning work.
The above tax recommendations are general. It is best practice to check the regional requirements for your business entity setup and documentation. It is highly recommended you consult a tax professional for tax advice.