Independent Contractors Set a Course for Entrepreneurship
By Laura Norris, J.D., and Mary Fuller, J.D., the Entrepreneurs’ Law Clinic at Santa Clara Law
There are many paths to entrepreneurship. Entrepreneurs are driven to start their own businesses largely by necessity, opportunity, inspiration, or some combination of all three and other factors as well. There are also business owners who may not set out to pursue entrepreneurship, and begin on another path instead. This is a common road for independent contractors.
Creating a Business Opportunity
Independent contractors often create a business opportunity out of the knowledge, skill, and experience they already have. They may provide their expertise to another business, an individual, or both. For example, someone who studied accounting in school may provide bookkeeping services to a few local small businesses as an independent contractor, rather than working for one organization full-time. Similarly, someone with skills in computer graphic design might offer services in logo design, website development, or digital marketing. Sites like Fiverr and Upwork provide platforms for independent contractors to easily market their services to a broad audience.
Advantages and Disadvantages of Being an Independent Contractor
Independent contractors have several key advantages compared with full-time employment. As an independent contractor you are your own boss. You can set your own rate as well as choose your clients, the projects you’d like to pursue, and the hours you’d like to work. You can manage the size and scope of your business to fit your lifestyle, and you are not tied to one employer.
There are disadvantages as well. As an independent contractor you will not receive benefits from an employer, such as medical benefits, retirement plan contributions, company equity incentives like stock options, holiday/sick/vacation pay, and others. You will also not be covered by the employer’s medical insurance or have unemployment insurance. In addition you will need to be responsible for marketing your business, managing your clients, estimating and paying your own taxes, obtaining the appropriate licenses and permits, and purchasing adequate business insurance as appropriate.
Independent Contractor or Employee?
It can be confusing to know when a person is or should be an independent contractor versus an employee. In recent years, states have been passing laws that help clarify the difference between independent contractors and employees. Individuals may prefer to be engaged as independent contract workers for greater flexibility, autonomy, and perhaps higher pay; and similarly companies may hire workers as independent contractors for their own flexibility and cost savings. However, some companies may have policies that workers must be hired as employees, in large part because of laws intended to protect workers who should be classified as employees rather than independent contractors. It’s important to understand the laws in your location.
For example, several years ago California’s law changed, adopting the “ABC test” to define an independent contractor as one who satisfies all three of the conditions below:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Source: California Labor & Workforce Development Agency.)
The ABC test made it significantly harder to classify a worker as an independent contractor, mostly due to the “B” part of the test. However, new legislation was recently passed in California relating to exceptions to the ABC test, which in those cases makes it easier to classify certain kinds of workers as independent contractors. Some exceptions expressly require the worker to have registered and licensed their business in order for the exception to apply. For other exceptions, an established business is not required but is one of many factors weighing toward allowing the worker to be considered an independent contractor. Either way, independent contractors who formally establish their businesses are taking a step in the right direction to minimize the risk of misclassification. This can be important for pursuing contract opportunities, because it minimizes the risk to the hiring company.
Recommendations to Setting up an Independent Contractor Business
While the guidelines may differ from state to state, there are a few minimum recommendations to set yourself up as an independent contractor:
- Decide on your business structure. Independent contractors are often sole proprietors, meaning one person conducting business. However, some people may decide to form a partnership with one or more other persons, or they may elect to establish as a limited liability company (LLC) or corporation.
- Obtain a tax ID number. You will need to register for an employer identification number (EIN) or use your social security number (SSN) or individual taxpayer identification number (ITIN) to operate your business in the US.
- Register a Fictitious Business Name. A fictitious business name (or DBA “doing business as” name) is the official name of your business that you will use on all invoices, communication, and marketing. You typically file with the County Recorder’s Office (this may also require publishing your business name in a local paper within 30 days). The fictitious business name filing is appropriate when the business is not operated under your own name(s) (if it is a sole proprietorship or partnership), or is operated under a name different from the official LLC or corporation filing (if it is an LLC or corporation).
- Obtain a business license. A business license is typically issued on an annual basis by the city or town of your business’ location, so each year you will need to renew. If you are using a fictitious business name, use that name to establish your business license.
- Obtain any permits associated with your business. Certain businesses may require a special permit. For example, if you are selling food items you prepare at home or an off site kitchen you may need a food handler’s permit, a commercial kitchen license and/or other permits. These are in addition to any licenses required for particular vocations such as electrician, contractor, hair stylist or other beauty industry professional, accountant, child/day care, etc.
Other recommended activities to establish yourself as an independent contractor include:
- Establish a separate bank account for your business (for payments).
- Obtain a Business Tax License (if applicable).
- Purchase business insurance.
- Create a website for your business.
- Advertise your business.
As an independent contractor you may decide to pursue small jobs here and there, work primarily with a few larger organizations, or something in between. Since you may need to verify your status and eligibility as an independent contractor to pursue contracts, the activities above will contribute to establishing your business as an independent entity. In addition, you may want to pay your estimated taxes quarterly. It can be difficult for small businesses to plan ahead and budget for large tax payments at the end of the year. Paying a quarterly estimate will allow you to manage your cash more evenly with regard to tax payments. Because independent contractors are responsible for paying their own income taxes (the income taxes are not deducted from their paycheck), it is important to plan ahead and budget for tax payments, which could be quarterly or yearly.
Timesheets, Pricing, Invoicing, and Contracts
Before you pursue business opportunities, it may be a good idea to consider your pricing model and how you will bill for your services. It can be helpful to use a notebook or an online spreadsheet program to track your hours or jobs as you go rather than trying to remember all your activities at the end of the month. You can use an online word processing tool or graphic design program such as Canva to create an invoice template. Bookkeeping software programs such as QuickBooks or payment platforms such as Square also provide invoicing tools that integrate with their software. As an independent contractor, you will likely sign a contract provided by the organization for which you are providing products or services. However, it might be a good idea to do some research online, consult with a business attorney or a free business clinic like Santa Clara Law’s Entrepreneurs’ Law Clinic, and have your own contract template handy in the event you work for an organization or individual who does not have a standard contract.
While independent contractors may not always consider themselves entrepreneurs, both are creating business opportunities for themselves. Both also benefit from establishing their business endeavors through activities such as creating and registering a business name, deciding on a business organization, obtaining a tax ID number, and more. Consider how you will track your time and projects, in addition to your pricing, invoicing, and contracts before pursuing business opportunities. By following these guidelines, you can better protect yourself and your business, and also pursue opportunities that require verification of your independent business status. In today’s gig economy, there are many ways to bring your skills to the market and create a new business opportunity!
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About the authors:
Laura Norris, J.D., is Santa Clara University School of Law’s Associate Clinical Professor; Co-Director, High Tech Law Institute; Director, Entrepreneurs’ Law Clinic; Director, Tech Edge J.D. Program, and Faculty Advisor, ChIPs Women in Tech Law as well as a MOBI Advisory Board Member.
Mary Fuller, J.D., is a Senior Clinical Fellow at Santa Clara University’s School of Law’s Entrepreneurs’ Law Clinic and Entrepreneurs’ Legal Advising Clinic and the founder and principal at Fuller Tech Law in Silicon Valley.
The Entrepreneurs’ Law Clinic at Santa Clara Law services the active local startup community by delivering quality legal services to entrepreneurs through the use of second- and third-year law students. Entrepreneurs have two opportunities to receive services: 1) The Entrepreneurs’ Law Clinic (ELC) is a transactional clinic assisting with transactions crucial to startup companies, such as business entity formation, financing, operational contracts, company policy, website terms of service, and intellectual property licensing; and 2) Broncos Entrepreneurs Advisory Clinic Hours (BEACH), a by-appointment brief advising sessions in which business owners and entrepreneurs meet with an experienced licensed pro bono business attorney and student volunteers about business legal issues or concerns they may have. The sessions are for a set time, typically between 30 and 60 minutes.