There are many ways to make a living as a contractor or tradesman. You might be an employee for someone else’s business, a self-employed business owner, or take on work as an independent contractor. There are pros and cons to each setup, but at the end of the day, does it really matter so long as you get paid?
The short answer is: Yes, it does matter. Your formal employment status affects every aspect of your work situation. That’s why it’s critical to thoroughly understand the options available to you.
Self-Employed vs. Independent Contractor
Working as an employee for someone else is a structure familiar to most contractors. This may have been how you started your career, as a paid employee or apprentice for a more experienced contractor. However, you may have less of an understanding when it comes to self-employment versus being an independent contractor.
Simply put, a self-employed tradesman and an independent contractor are essentially the same thing. Both choose the projects and clients they wish to work with and earn money directly for themselves or their business. Regardless of which trade skills you specialize in, there isn’t much of a distinction between being self-employed and being an independent contractor.
What does an independent contractor do?
As an independent contractor, you work on a contract basis to offer a service or specific items to your client. Independent contractors are typically hired to finish a specific project or work for a set period of time. For instance, you could be hired to design and build a custom-made shed for a customer’s backyard. However, someone who builds furniture without a specific customer in mind and sells it in a store is not generally considered an independent contractor.
How do I become an independent contractor?
The legal criteria for becoming an independent contractor differ from state to state, and sometimes even between counties or cities. Requirements are also based on the sort of business you want to run. For example, an electrical contractor will need to meet different requirements than a carpenter.
Legal requirements for becoming an independent contractor generally include training specific to your specialty, passing an exam administered by a government office, and paying a fee to receive the relevant licenses. You will also be required to follow local zoning and safety regulations.
Do independent contractors need to register a business name?
In most states, you may need to register your business name to work as a self-employed contractor. This is generally the case if you have opted for something unique. However, if your personal name is part of your business name, you may not need to register the business name. This step can help protect your trademark and prevent other businesses from using the same name for their business.
Do independent contractors need insurance?
An important step most self-employed contractors take is to secure insurance. This, too, is dependent on your specific business. States and trade organizations often require contractors to have certain types of insurance and maintain minimum levels of coverage.
Insurance for contractors helps protect your business against common risks associated with the work that you do. These might include damaging a client’s property, accidentally injuring a third-party, injuring yourself on the job, or having your tools stolen, along with many other potential accidents and events. Contractors often take out multiple policies to help cover all the risks their business may face, including General Liability and Worker’s Compensation.
Does being an independent contractor affect my taxes?
When it comes to submitting tax returns, you may need to keep some things in mind as an independent contractor. Employers pay social security and Medicare taxes for employees. If you are an independent contractor, you’ll have to pay self-employment tax, which includes Medicare and Social Security Tax deductions for self-employed contractors. There are also deductions that you can take advantage of as someone who is self-employed. An accountant may be able to assist by providing a comprehensive list of these independent contractors’ tax deductions and answer your questions about what you may deduct.
Choosing work that works for you!
As you can see, being a self-employed independent contractor has a significant impact on your money and day-to-day work activities. There are added considerations that you may need to make before opening your own business. However, if you do decide to take this career path, the benefits could outweigh the cons!
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