The United States has been designated as the land of opportunity for decades by many — and for independent contractors — this is still the likely case. However, some crucial variables come into play when operating as an independent contractor in the US.
Independent contracting in the US requires the typical amount of self-starting finesse that you would expect from an independent worker, however, there are still some hoops that one has to jump through in order to secure the lifestyle of a successful US-based contractor.
In this report, we will break down the logistics of independent contracting in the US, the licensing steps and the regulatory status of independent workers from coast to coast.
US Contractors
As with the Canadian Revenue Agency (CRA), The United States Internal Revenue Agency (IRS) has broken down the aspects of what makes up a contractor, and specifically, how in the eyes of the US government they are categorized as a ‘self-employed worker.’ This means that US-based contractors have to manage their own self-employment tax as well as other business-related obligations, including invoicing, resource management and personal compliance with state and federal regulations.
The IRS provides documentation to help establish one's independent contractor status during tax season.
How to Register as an Independent Contractor
When it comes to how to function as an independent contractor in the US, you will be surprised to know that there aren’t that many hoops to jump through. However, some components require closer inspection.
Certain US states require an independent contractor to provide a business license and obtain a business number before conducting any work for a prospective client. In this case, the two states in question are Alaska and Washington, with some other exceptions that require a bit more investigation with your local state clerk.
When it comes to how to handle business registration as an independent contractor in the US, the process can be quite streamlined. However, it is still best to know the steps to take to make sure you engage in this process correctly and ensure that nothing falls through the cracks. Choose Your Structure: You must decide on the legal structure of your independent contracting entity. Some of the forms you can choose in states that require registration are:
- Sole Proprietorship: You operate as an individual, and your business income and business expenses are reported on your tax return.
- LLC (Limited Liability Company): You create a separate legal entity that provides some personal liability protection.
- Corporation: You establish a distinct legal entity with various tax and liability implications.
Name Your Business
If you're not operating under your name as a US-based contractor, you may need to register under the DBA (Doing Business As) moniker with your local state government.
Employer Identification Number (EIN)
Even if you're a sole proprietor with no additional staff, it's a good idea to register an EIN with the IRS, which you can apply for online through the official IRS website.
Register with Local Authorities
Depending on your location, business and status, you may need to register your business with local regulators. This could include registering your business name, obtaining a business license or making sure you meet certain compliance standards.
Tax Obligations
As an independent contractor, you'll be responsible for paying taxes, including your Social Security and Medicare taxes. You may also need to pay state and local taxes. Ensure you understand your tax obligations and deadlines.
Set Up a Business Account
Separate your personal and business lines of income by opening a dedicated business bank account. This makes it easier to track income and expenses for tax purposes, as tax responsibilities fall on you as a contractor.
Maintain Records
Maintain detailed records of your net income, expenses, receipts, contracts, and invoices. Good record-keeping is essential for accurate tax reporting, as tax maintenance is crucial for compliance.
Deductions
Be aware of tax deductions available to independent contractors, such as home office expenses, business-related travel, and equipment costs. Keep receipts and records to support your deductions.
File Taxes
File your federal income tax return using Schedule C (Profit or Loss from Business) or Schedule C-EZ. Pay self-employment taxes as required. You may also need to file state and local tax returns.
Insurance
Depending on the nature of your work, obtaining business insurance to protect yourself and your business is the ideal way to keep your interests and income safe.
Regulatory Compliance
Numerous industries have specific legal standards, certification and compliance needs. Be sure to understand and meet these obligations, or have a third-party affiliate help you with these needs like an Employer of Record (EOR).
Professional Consultation
If you're uncertain about legal or tax matters, consulting with lawyers, accountants and tax advisors who specialize in working with independent contractors is encouraged. Additionally, third-party services like an EOR can manage these concerns and take you through them step-by-step.
Renew and Update
Keep your business registrations and licenses up to date and renew them as required by your local and state regulations.
Stay On Top of Compliance
Stay informed about changes in tax laws, regulations, and industry standards that may affect your independent contracting business. Make adjustments to your practices as needed to remain compliant in certain regions you plan to operate in, be they local or international.
Independent Contractor Risks
While operating as a US-based contractor comes with a large variety of workplace freedoms, such as remote work, personal schedule and client variety, there is also some risk that comes with this untethered form of work.
No form of employment is perfect, because no matter what, every job comes with pros and cons. If you are a US-based independent contractor, there are some risks to keep in mind before you start the process of registration or start looking into bringing on a consultant.
Variability
As a result of moving from client to client, independent contractors often have irregular income streams. You may experience periods of high demand which offer stable income, only to be then met with dry spells with little to no work. Financial planning and budgeting become crucial to managing income fluctuations as you continue your operations as a contractor.
Lack of Benefits
Independent contractors are not eligible for employee benefits such as health insurance, retirement plans and paid time off. You are responsible for arranging and funding these benefits yourself, which can be accomplished through careful budgeting or outside assistance.
Tax Responsibility
Independent US-based contractors are considered self-employed, which means you're responsible for paying both Social Security and Medicare taxes. You also need to make estimated quarterly tax payments to the IRS.
Lack of Job Security
As an independent contractor, you don't have the job security that comes with traditional employment. You are not protected by labor laws governing employee rights, including protection against wrongful termination.
Limited Protection
US-based independent contractors may have limited legal protections and recourse in case of disputes with clients. Contracts and legal agreements become crucial for protecting your interests, make sure you have access to a legal consulting body before engaging in contract positions.
Dependence
Relying on a few choice clients can be risky and if a major client decides to stop working with you, it can significantly impact your income and stability. Ensure you keep a varied pool of clients to work for to maintain financial stability.
Unpredictable Workload
Juggling multiple clients and assignments can be challenging and there may be times when you have too much work to handle comfortably. Additionally, in some cases, it can be the exact opposite, so make sure you are managing your time and clients correctly.
Self-Marketing
As an independent contractor, you must actively market and sell your services to secure clients both in the US and abroad. This requires time and effort to build a client base and maintain a steady stream of work, additionally, you can always inquire with past clients about potential leads for work elsewhere.
Overhead Costs
Freelancers often bear the costs of running their businesses, including office space, equipment, software, and marketing expenses. These costs can add up and affect your profitability, so make sure you keep track of your money going in and money going out at all times.
Diversification
To stay competitive, you may need to constantly revise and diversify your skillfulness to adapt to changing market needs.
Healthcare
Healthcare expenses can be a significant concern. Independent contractors need to purchase their health insurance, which can be costly.
Retirement Planning
Saving for retirement becomes your sole responsibility, as you won't have access to employer-sponsored retirement plans. Additionally, need to set up and fund your own retirement account with your bank of choice.
Operating as a Consultant
Now that we’ve covered some of the pitfalls of freelance contracting in the US, and how to avoid them, we can now look into specific forms of contract-based work. In this case, we’ll be taking a dive into the world of independent consulting and how to operate as one in the US.
An independent consultant is a freelance agent who can move without restriction from client to client and provide generalized services. They provide services that are purpose-built to supply businesses with expert advice on a contractual basis.
Consultants are not restricted to business operations either and can provide services for other contractors or non-profit organizations. Independent consultants in the US are hired on a case-by-case basis and usually specialize their practice around certain services.
Some of these services can include:
Management Consulting
Independent consultants can offer strategic planning and business development incentives that include organizational restructuring, efficiency optimization and performance measurement and management for potential clients.
Marketing Consulting
Consultants can conduct market research and analysis as well as branding strategies for clients.
Financial Consulting
Independent consultants in the US can also offer financial analysis and reporting, such as budgeting and financial forecasting and investment and portfolio analysis services.
IT Consulting
Consultants also offer IT strategy and planning systems analysis and software selection for prospective clients.
Human Resources Consulting
Independent consultants can also review and implement HR policy and procedure development.
Legal Consulting
Consultants who specialize in legal services can engage a potential client and supply them with services such as contract review and negotiation.
Nonprofit and Social Impact Consulting
US-based independent consultants can engage clients and help them with matters such as non-profit strategy, fundraising planning and program development and evaluation.
Real Estate Consulting
Independent US-based contractors can also engage in real estate market analysis and feasibility studies. This can include, but is not limited to, property valuation and investment analysis as well as real estate development and project management.
When it comes to how to register as an independent consultant, the steps are fairly similar to that of any other contractor. There are, however, certain priorities that come with setting up a consulting business.
For example, registering an LLC (as suggested to contractors), marketing the services you provide, determining the pricing of your service and your ideal client base, and last but not least, looking for outside assistance such as third-party services for your administrative needs, like an EOR.
How Borderless Can Help?
A third-party service, like an EOR, is an ideal extension for any business looking to engage with freelance contractors or consultants within the US.
A service like Borderless can help manage the administrative burden, whether you are a business looking to engage with a contractor/consultant or are looking to have your administrative payload substantially diminished by operating as a freelance worker.
Borderless can help you no matter what side of the employer/employee fence you are on and we are constantly updating and supplying our reports and blogs on international commerce, as well as working conditions within the US.
Whether you are looking to leave your administrative duties in the hands of trusted professionals, or are looking for some information on the expansive world of contractor-base commerce, we here at Borderless have your back.
Check out our list of comprehensive blog posts here, so you can stay ahead of the game and ensure that your standards as a business or contractor never waver in the face of an ever-changing economic landscape.
