The road to self-employment often starts with becoming an independent contractor. Keep reading to learn about what an independent contractor is, how to become one, and what types of opportunities are out there.
What is an Independent Contractor?
An independent contractor is a person who performs work for another person or company based on a contractual agreement. They’re not full-time employees and can determine when and how work can be done, as well as how much to charge for it.
As an independent contractor, you’re your own boss. You may have extra responsibilities and liabilities. But if you work hard and continue to grow your client base, you might enjoy a much bigger payoff down the line. You might even be able to position yourself to earn passive income if you hire employees (or independent contractors) to service clients for you.
It all starts with landing that first independent contractor gig.
How to Become an Independent Contractor
- Pick your niche
- Make a business plan
- Understand your business structure
- Rev your marketing engine
- Get a contract
- Get to work
1. Pick your niche
The first step to becoming an independent contractor is to narrow down the type of work you want to do. The most successful businesses are very good at providing a specific service. So think about a particular niche in which you’re an expert and start there.
You can always refine your focus as you go along. But having a vision out of the gate will certainly make things easier. Whether it’s driving for Uber, crooning as a wedding singer, or doing graphic design work for an online boutique, what you pursue is truly up to you.
Common independent contractor positions
Here’s a quick list of common independent contractor jobs:
- Virtual assistant
- Freelance writer
- Consultant (e.g., SEO consulting, marketing consulting)
- Uber or Lyft driver
- Designer (e.g., web design, graphic design)
- Real estate agent
2. Make a business plan
After deciding your area of focus, the next step is to outline how your business will operate.
This step will help you understand how to price your project so it’s worth your time. You’ll also get an understanding of how many clients you’ll need to achieve your financial goals and job security.
3. Understand your business structure
Your business structure has a big impact on your taxes, liability, and personal safety.
In some cases, you can get started without registering a business. However, some lines of work may require you to form an S corporation or limited liability corporation (LLC).
The best thing to do is speak to an attorney or tax advisor to determine what type of structure your business needs. It’s also easy to register a business online using LegalZoom.
4. Rev your marketing engine
To succeed as an independent contractor, you’ll need a steady pipeline of customers. That means you absolutely must market yourself.
But effective advertising doesn’t need to be complicated or expensive. Here are some easy, low-cost steps you can take to market your services effectively:
- Get business cards
- Build a simple, low-cost business website
- Optimize your LinkedIn profile
- Attend related networking events in your area (and don’t forget those business cards)
5. Get a contract
It’s always a good idea to establish a basic independent contractor agreement with any client you’re providing services for. On a basic level, this agreement should outline the following things:
- The scope of the project
- The payment terms (e.g., upon delivery, upon month-end, net 30, etc.)
- The pricing of the project
- The legal status of each participant
Some clients may provide you with a contract. If not, it pays to hire an attorney to help you draft an agreement you can use and reuse.
When it comes time to get paid, independent contractors usually invoice their clients. You can either do this with a spreadsheet or PDF or use a paid service such as QuickBooks.
Typically, you’ll submit your invoice upon project completion of the project or at the end of the month (depending on the terms of your independent contractor agreement).
7. Get to work
Make no mistake about it — if you want to be successful as a self-employed worker, you’re going to have to find clients and make them happy. So start lining up opportunities and then get to work.
Your first few clients are the most important because you’ll depend on them for repeat business and word-of-mouth recommendations. Go above and beyond when it comes to the quality of work to ensure your clients keep coming back for more.
Tips for Independent Contractors
You’re a partner, not an employee
Not all businesses are accustomed to working with independent contractors, and some may push the boundaries of your arrangement.
Don’t be afraid to push back if your customer makes requests beyond the scope of your agreement. They’re not your employer, and your time is valuable. Your clients can’t afford to provide free services, and neither can you.
Watch out for taxes
As a sole proprietor, you alone are required to make tax payments and ensure your own business remains in compliance. In addition, Medicare, payroll tax, workers’ compensation, healthcare costs, and employee benefits all fall on you as the business owner.
The easiest way to navigate all of these tax obligations is to hire a qualified tax professional. It might cost a few hundred or even a few thousand dollars, depending on the complexity of your situation. However, this is simply a cost of doing business that you don’t want to skimp on.
As a freelance worker, it might take several months for your business income to hit your bank account. That’s why it’s essential to plan ahead and set aside money to cover your business and life expenses.
It’s also important to carefully track your income and expenses. I typically recommend opening a separate bank account specifically for your side hustle to make accounting easy. Look into companies like Lili and Novo that specialize in banking for freelancers and small businesses.
Frequently Asked Questions
Do you need a business license to work as a contractor?
It depends on what type of work you’re doing and where you live. Some states and industries have strict laws that require business licenses. Check with your local authorities to make sure you’re in compliance before pursuing work.
Generally speaking, you don’t need a business license if you’re performing a traditional side hustle, such as freelance writing or design. However, you may need one if you’re a doctor, lawyer, accountant, insurance agent, real estate agent, engineer, teacher, or public safety worker.
Does the IRS tax independent contractors?
Independent contractors are required to pay income tax. In addition, they must also pay a self-employment tax of 15.3%. This tax covers Social Security and Medicare.
That said, there are a variety of ways to lower your business tax liabilities. In particular, there are many different things you can potentially write off as a deductible business expense. Talk to a tax advisor to learn more.
Is freelancing hard?
Freelancing can be very hard, depending on the type of work you’re doing. It can be a “feast or famine” situation, with more clients than you can handle one month and too few the next. Make sure to research the market thoroughly, or you could wind up working for someone else again.
The Bottom Line
Becoming self-employed is one of the most common pathways to financial freedom. If you play your cards right, independent contracting can generate a substantial amount of income, putting you in total control of your finances.
At the same time, this path requires taking on the responsibility of being your own boss and setting your own schedule. You’ll also have to learn new skills (e.g., bookkeeping). Furthermore, you’ll be required to pay for health insurance, and only you can add funds to your retirement account.
It’s a ton of work — but trust me, it’s worth it! I’ve followed the same path and would do it all over again in a heartbeat.
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