Even if independent contractors want to overcome existing obstacles, some might not be able to move into independent positions owing to the experience needed. You are in the best place, if you are thinking about switching to a freelancing career. However, if you are unsure about how to become an independent contractor then this blog can lead you to end up freelancing which could be the best step in your professional life. Check out the pros and cons of freelancing and what qualifications you require to be a freelancer in this article.
Table of Contents
- What is an Independent Contractor?
- Essential Steps to Becoming an Independent Contractor
- Finding Clients and Marketing Your Services
- Managing Finances and Contracts
- Tools and Resources for Independent Contractors
- Legal Considerations and Compliance
- Pros and Cons of Being an Independent Contractor
- Faqs
What is an Independent Contractor?
If you look at the independent contractor definition it would surely mention that an Independent Contractor is a self-employed person working for another property/entity; typically not an employee. Medicare taxes, which generally a freelancer has to pay along with social security payments.
In addition, an entity that uses such services of an independent contractor is not required to provide them with the employment benefits that might otherwise be applicable to employees. These benefits include providing health insurance or employer-sponsored retirement accounts. The payer must hence clearly classify whether the payee is an independent contractor or an employee.
If you are an independent contractor you have a bit more freedom regarding things like how much and when you can work, you basically get to decide how you want to work, giving you more control over how you operate. You will also have to do the taxes yourself as an independent contractor.
Essential Steps to Becoming an Independent Contractor
Independent contracting could have a lot of benefits coming along with it, but how do you get there by yourself? There are multiple ways that you can approach to get yourself a self-employment opportunity. Whether you are looking to stop working to earn someone else’s money or just looking for additional income, these three steps will easily take you through how to become an independent contractor
Setting up a Business Structure
When you first step in as an independent contractor you are a sole proprietor which means you are the exclusive owners of your unregistered business. In this section, there is no legal distinction between your business entity and you which means your business assets are completely your personal assets. As you start taking on clients you can become take on one of the following business structures:
- Incorporation – If you sell products or hire employees then it will be called an incorporation. There will be a board of directors who help you grow the business.
- One-person limited liability company (LLC) – In order to form an LLC, you must be the only owner of the company. You must not have workers and must register your business, personal assets, and business assets individually.
- Partnership – If you provide any professional services such as accounting, law, or dentistry then you could consider a partnership. A partnership means taxes, profits, and losses will be shared with your partner.
Once you have chosen your business type it is time to choose a name that will ensure consistency for your clients. To choose a fictitious name you might need to file a fictitious name statement. Registering will also prevent other companies from using the same name.
Registering for Taxes
A tax registration involves confirming your business being registered for tax purposes. Most of the cities require every business to register with their local tax collector. Some however will only require registration if you earn above a certain amount each year. Getting an EIN also called Employer Identification Number from the IRS will be important for managing your business taxes.
- Getting an EIN (Employer Identification Number)
- Independent contractor tax obligations (e.g., quarterly tax payments)
Obtaining Required Licenses and Permits
One of the main parts of how to become an independent contractor is obtaining required permits and licenses. The permitting and licensing rules may vary from place to place and from industry to industry. Plumbers might need a plumbing license whereas a food consultant may require a food handlers’ permit. Hence you need to conduct your research to make sure you are fully compliant. Check the federal, state, and local requirements to ensure complete compliance. This might also include applying for health permits, professional licenses, or zoning permits.
Suggested read: Independent Contractor Agreement for USA
Finding Clients and Marketing Your Services
Once you have set up your business by following all the basic steps, it is time to get yourself a few clients and get the business running. Here are a few ways in which you can gain clients:
By defining your niche
The first step is to find the right clients to define your niche. What is the problem that you wish to solve for them and what are your skills associated with it? You could also mention what are the properties of your business that set you apart from other organizations.
Building your network
The network is one of the most effective ways to meet new people while also getting a few recommendations. You could work both offline and online. You can utilize social media platforms such as LinkedIn, Facebook, or Twitter online for the benefit of your business. You can attend industry events, conferences, workshops, and more to network in person.
Creating your portfolio
Finding clients to create your portfolio is very important. A portfolio with your previous projects and works being detailed will give a better idea to the clients regarding the skills you possess. You could create your portfolio using WordPress, or Behance based on your niche or preferences.
You might also want to start by advertising your services. You might want everyone in your network to know more about your business and what are the services you are providing. Learning marketing could be an essential skill especially if you are going to become a business owner.
While you can also outsource your own marketing team to do this job, it could prove to be very expensive, especially at the start. What’s more, if you do hire a marketing team, you could get people who are experts in marketing channels and will help you connect with the right people. You could also reach out to your friends and family members for better support.
Managing Finances and Contracts
Finances are a top priority when it comes to becoming an independent contractor. Managing your money effectively could either make or break the entire success of your career path.
Creating Contracts
An independent contractor agreement is a document that legally binds an individual contractor and a company. It also outlines the key elements of the collaboration such as:
- Payment rates and schedule
- Confidentiality requirements
- The scope and nature of the contractor’s role
- Intellectual property ownership (if relevant)
Setting Up a Payment System
As an independent contractor, it is up to you to handle the invoices and collect the payment. This means you will have to bill every client individually and collect payment through the preferred method. This could be quite tedious. But here are some of the most common ways that most people collect payments:
- Direct deposits
- Bank transfers
- Money order
- Digital transfer services
- Virtual wallets
- Paper checks
While bank and digital transfers could be pretty quick, it does often come with heavy charges. And if you have got international clients the payment methods could become more complicated. This is why Asanify is a great solution. Through our platform, it is possible to get paid quickly in Indian rupees in a simple, reliable, and secure way.
Tracking Expenses and Budgeting
As a freelancer, it’s advisable to maintain a file of crucial paperwork to safeguard against the IRS. You must understand the duration for which you should retain a tax expense spreadsheet, receipt book, or cash receipts journal when monitoring expenses. Here are some documents that you may wish to retain copies of:
- Tax returns
- Travel mileage logs
- Business cards
- Project records
- Invoices
- Service listings and advertisements
- Insurance certificates and professional licenses.
Maintaining a well-organized system for your financial documents is very important for smooth financial management. Here are a few of the methods to keep track of your documents:
- Creating a filing system
- Using accounting software
- Going digital and using cloud backup
Suggested read: 1099 Employee – A Complete Guide
Tools and Resources for Independent Contractors
Having to manage your workload, making sure you get paid on time, and keeping track of your expenses together could get a little messy and would become overwhelming. That’s where you need to include apps and resources that will keep your freelancing an easy task.
Evernote
Evernote is a good application for independent contractors that helps you to keep all of your to-do lists, ideas, and notes in a reliable storage. Like you have a filing cabinet, but it is digital and you can access it from anywhere.
Asanify
With the help of Asanify, you can manage your contractor payroll and also get rid of any frustrations that come across due to complex payment procedures. You can also stay fully compliant while following all the global labor laws. You can also automate the storing of documents in a centralized platform while generating invoices and an easy single-click payroll run.
Zoom
When it comes to virtual meetings and video calls, Zoom is one of the best ones you can go with. With this, you can still share your screen, and host and record sessions for client meetings. Zoom is relatively good for communication considering its simple interface and quality video and audio.
Legal Considerations and Compliance
As an independent contractor, you must understand the legal framework that governs your work with your client.
The Indian Contract Act
The Indian Contract Act of 1872 lays the foundation for all your contractual relations along with defining the essential components of your valid contract. Ensure your agreements comply with these requirements and clearly mention the payment terms, scope of work, and other essential clauses to avoid any further disputes.
Contract Labor Codes
There are two labor codes that all individual contractors need to follow such as given below:
Code on Wages, 2019
This code indicates the basic pay, retaining allowance, and dearness allowance. It however excludes components such as overtime allowance, commissions, and rent allowance.
Industrial Relations Code, 2020
This code allows companies with up to 300 workers or more to close down, retrench, or lay off without any permission from the government which may affect your job security.
GST
It is important that every individual contractor in India should register for GST also called Goods and Services Taxes if their annual turnover exceeds Rupees 20 Lakh. Most freelance services usually require an 18% GST rate which the contractors tend to charge through the clients and deposit it with the government. Maintaining accurate records and using GST-compliant invoices is important for compliance.
TDS
Independent contractors are also subject to TDS where the clients tend to deduct tax at a fixed rate before they make any sort of payments. The total TDS rate for professional services is 10% if the total payment of the financial year exceeds 30,000 rupees per year.
ITR Filing
If you are an independent contractor you need to file your income tax returns with using ITR-4 it way or IT-3. If there is no audit, the deadline is July 31, and if there is an audit, then 31 October.
Pros and Cons of Being an Independent Contractor
Note that, given the increasing quantity of independent contractors, it is important to look at the pros and cons of being an independent contractor before making this choice.
Pros of being an independent contractor
- Freedom and flexibility
- Access to tax deductions
- Lucrative career
Cons of being an independent contractor
- More responsibility
- Liable for self-employment tax
- Inconsistent income
Now that you know the pros and cons of being an independent contractor and how to become an independent contractor it is surely time to become one of the freelancers you have always looked up to.
FAQs
What does it mean to be an independent contractor?
An independent contractor is a self-employed individual who is paid for a specific task that they complete for another party.
Do I need a business license to work as an independent contractor?
If you opt for a sole proprietorship then you just need a business license which does not require much paperwork and can be done on your own.
How do I pay taxes as an independent contractor?
As an independent contractor, it is important that you report all your income via a form of either ITR-3 or ITR-4 based on your income and the nature of your business.
What is the best way to find clients?
One of the best ways to acquire clients would be to go out and socialize with clients. Improving your network is also another great way to lengthen the list.
What should be included in an independent contractor contract?
In an independent contractor contract agreement, there needs to be a mention of all the responsibilities and duties of the contractor. It should also provide more details about performance metrics, timelines, deliverables, and what work they will be performing.
Can I work as an independent contractor in multiple industries?
Yes as an independent contractor, it is possible to work in multiple industries. You can also choose to work with multiple clients at once. Unless you sign a non-compete clause which will then stop you from indulging with multiple organizations.
What is Asanify, and how does it help independent contractors?
Asanify is an easy-to-use platform that helps manage the relationship between individual contractors and their clients. This is done by providing certain services such as:
- Managing your payroll
- Auto invoice generation
- Digital contract creation and signing.
Not to be considered as tax, legal, financial or HR advice. Regulations change over time so please consult a lawyer, accountant or Labour Law expert for specific guidance.
