Because contractor work is heavily reliant on skill and problem-solving, it’s very easy to be tempted to take on paid projects without proper licensing, especially if you have a knack for challenging, hands-on work. But at all costs, refrain from the temptation for it is illegal in all states.
Of course, there’s nothing wrong with side projects, but when you decide you want to make a legitimate business out of your talents, there are some legalities you’re going to have to comply with first.
Legal Requirements to Work As an Independent Contractor
Determine That You’re an Actual Independent Contractor
A lot of times people confuse what it means to be an independent contractor and an employee. To be an independent contractor means that you’re in business working for yourself. Now, if you’re working for a company and that company dictates how you work, the hours you work, and the benefits you receive, then you’re an employee.
Some other ways to determine if you’re an independent contractor or employee include:
- You work with multiple clients on a contract basis
- You pay for your own business expenses
- You set your own schedule
- You have all the required certificates, training, and business licenses
- You don’t receive employee benefits
If all of these options are dependent upon a separate firm’s decisions, then you’re not an independent contractor. Now, you might be having a hard time securing a job due to the pandemic but as long as everything you’re doing is for your own business, you’re indeed an independent contractor.
You might also be wondering if you can be both an employee and an independent contractor? Well, this can be quite the slippery slope. The IRS has strict rules that you determine whether you’re an independent contractor or employee. For example, you can’t work as an employee for a company and work as an independent contractor for that same company. But, you can work as an employee for one company and then work as an independent contractor for a totally separate company. Just be sure to check the regulations for your state.
Obtain All Necessary Licenses
License requirements vary from state to state and depend on the type of contractor license you’re pursuing. For example, if you’re looking to get into any type of contract work involving electrical, plumbing, or HVAC in Ohio, you’re going to have to obtain your Ohio contractor license and complete Ohio continuing education. Sources like RocketCert provide practice materials that can be beneficial to review before you go to renew your license.
Most people will take the “under-the-table” route because they feel the process to become an independent contractor is too tedious but it in fact isn’t as difficult as it may seem. Plus, there are way more benefits to becoming a licensed independent contractor versus being non-licensed. And the penalties aren’t worth the hassle either.
Did you know that if you’re caught performing contract work without proper licensing that you could face criminal and administrative sanctions? These sanctions could result in fines anywhere from $1000 to $15,000 (depending on where the work is performed) and as much as five years in prison or probation (depending on if felonies are charged).
Choose an Appropriate Business Name
When it comes to choosing an appropriate business name, people tend to think that they can just choose any name they want and roll with it… If only it were that easy. For one, you would need to check the US Patent and Trademark Office site to see if any other businesses are operating under that same trademarked name.
In choosing an appropriate business name, you want to make sure the name is easy to remember and reflects the services of the company. But you also want to make sure the name is unique as well. Something like “Smith Construction, LLC” is too common of a name and there will more than likely be a business already established under that name.
If there is a business with that name, you will have to find your business another name. Once you find that the alternative hasn’t been trademarked, you can then trademark it yourself and operate your contracting business under it.
Get Your Business a Tax Registration Certificate
In most states and cities, all businesses, regardless of size or if it’s a home-based business, are required to register with their local tax collector and obtain this certificate. It’s basically a receipt for the taxes you have to pay for the privilege of being able to run a business in the city you’re operating from.
Look at All the Benefits
There’s no reason to settle for under-the-table work when there are so many benefits to working independently. As an independent contractor, you have flexibility in your schedule, meaning you set the hours and the tone for when you work and how long you work. This is feasible because, with contract work, you’re hired to complete specific projects, not to work specific business hours.
Also, with contract work, no two jobs are the same. Just imagine going to jobs and working and learning new things. Even for lengthier projects, you’re still going to be doing different things each day, so the lack of monotony is a huge plus if you’re easily bored with repetitive routines.
And last but certainly not least, as an independent contractor, you have full control over your earning potential. With this kind of power, you can work as little or as much as you want, as often as you want. This is most convenient when doing small things to get ahead after typical normal business hours.
Now, that you know some of the basic requirements needed to work as an independent contractor, and the benefits of it, is it a little more enticing to you now? The benefits certainly outweigh the consequences of working unlicensed in terms of salary, flexibility, and job variations.
There are many other legal issues to consider in working as an independent contractor but the above are the bare minimum necessities to get started. Eventually, as your business forms and grows, you’ll have to get more affluent in marketing, accounting, and recordkeeping, but for now, just take baby steps in forming a legitimate contracting business.