If you’ve made the decision to become self-employed, you’ll need to figure out if you want to work as an independent contractor or establish an LLC or some other type of business. Your choice will depend on the type of services you offer, your long-term business goals, and how many other people are going to be involved in the business.
What is an Independent Contractor?
An independent contractor is someone who is contracted to perform work or provide services for someone else but is not an employee. A person who works as an independent contractor has to pay self-employment tax along with income tax. As an independent contractor, you do not have to register as a business or form a business structure. Typically, independent contractors are creative or technical professionals such as designers or web experts.
Independent contractors have the choice to form any type of business entity including a sole proprietorship, LLC, S Corporation, C Corporation, or a partnership. However, most independent contractors form sole proprietorships because it’s the simplest form of business.
So now you might be wondering – what’s the difference between an independent contractor and a sole proprietor? The truth is, an independent contractor and a sole proprietor are both small business owners, self-employed, and not registered with the state as a business. The main difference between the two is how you pay your taxes. A sole proprietor will pay Schedule C taxes while an independent contractor pays taxes through receiving a 1099-MISC. However, you can be both a sole proprietor and an independent contractor paying both forms of taxes.
As an independent contractor or a sole proprietor, your responsibilities include:
- Keeping track of business expenses.
- Keeping track of business income.
- Paying self-employment and income tax.
Establishing an LLC – Is there any benefits?
Another option if you are choosing to start a new business venture is to create a Limited Liability Corporation, or LLC. An LLC is a popular type of business structure that provides protection to the business owner. If you form an LLC, you are protecting your personal assets from being taken to pay off debts or liabilities. As a sole proprietor, you are do not have this level of protection and all of your personal assets could be at risk if legal action is taken against you. LLCs are required to register with the state and have to pay a filing fee to register. If you’re looking to form a growing business, an LLC might be the route to go. You can hire employees, expand your company, and have more security when you form an LLC.