Does an Independent Contractor Need a Business License to Work With Clients?
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Independent contractors can enjoy flexible work and generate more income than being a full-time employee at one company. But getting started as an independent contractor comes with many complex questions.
How do you pay self-employment tax? What kind of business agreement does an independent contractor sign? Does an independent contractor need a business license?
In this article, we answer all of these questions and more so you can get your business up and running in compliance with state laws.
Disclaimer: This post is US-focused. It’s provided for informational purposes only and should not be considered legal advice. Talk to a legal professional for guidance.
What is an independent contractor?
An independent contractor (also known as a 1099 contractor) is a self-employed individual or small business owner who provides services to client companies as a non-employee, usually on a short-term or per-project basis. The client company does not control an independent contractor’s work dynamics, such as how or when they complete their work.
Being an independent contractor has many unique benefits (even if you have to learn how to acquire liability insurance and unemployment insurance). But it also involves a lot of independent administrative work. Some workers prefer to be full-time employees because the company’s HR department provides workers’ compensation, health insurance, and handles payroll taxes.
Does a 1099 contractor need a business license?
It depends on your location and the type of business you work for.
Most industries that require business licenses for independent contracting have stringent licensing requirements. Think of fields like medicine, nursing, and law: these industries require you to obtain a license regardless of where you live or your full-time employee vs. contractor status. If you do graphic design, freelance writing, or other business-related jobs, the chances of needing a license decreases significantly.
Next, there’s your location. Most states do not require a business license to become an independent contractor within the US. Virginia doesn’t require a state-wide business license, except for some certification and licensing requirements for specific occupations. In Florida, any business selling merchandise or services must purchase a local business license, including one-person companies and home-based businesses.
In some states, such as Alaska and Washington, laws require all independent contractors to register business licenses. States may have conflicting requirements, too. For example, the requirements for needing an independent contractor business license in California vary by county and city. Reach out to your city’s business permit office to see what the local requirements are.
What exactly is a business license?
A business license is a government permit granted by your local government. There are unique business licenses for different business activities. Likewise, municipal, state, and federal offices each grant unique permits.
Businesses and workers that must obtain a business license include:
- Business owners with brick-and-mortar locations
They need a license that permits them to conduct commercial activity at that specific site. They may also require additional approval for safety issues, such as fire safety
- Anyone who sells physical goods
They must have a seller’s permit and collect sales tax from customers. Those who sell tobacco, food, or alcoholic beverages need additional business licensing
- Workers in specific industries
Such as electricians, childcare providers, accountants, real estate agents, medical care providers, and hairstylists
Again, if you’re a self-employed independent contractor, these rules may or may not apply depending on your location. Consult your local chamber of commerce to determine which requirements apply to your situation.
How do you get a business license?
This depends on your local chamber of commerce. They will let you know if you have to consult with the county clerk, call the city tax office, contact the Department of Public Works, or get ahold of the planning and zoning department (if you’re selling physical goods or services).
How do you get started as an independent contractor?
People stumble into independent contract work in all sorts of unique ways. It’s easy to sign an independent contractor agreement before understanding how to start a 1099 business and the legal and tax implications. If you want to work as an independent contractor, we recommend taking the time to register yourself correctly to avoid issues later down the road.
Choose a business name
A business name will go on all your business cards and invoices. Using a business name (rather than your full legal name) sounds more professional and memorable. It is also a great first step toward setting up a brand, a website, social media, and everything else you’ll need to promote your services and attract clients.
Register your business
Does an independent contractor need an LLC (limited liability company)? No, but it’s an option. You can register using your own name, register under a fictitious DBA (doing business as) name, or register as an LLC. Suppose you plan to do long-term independent contract work. In that case, you could register your business under a DBA or as an LLC: these options are the most legitimate and allow you to open a business bank account separate from your personal finances.
You can register your business under a DBA name at a municipal, county, or state level, depending on the location of your business. The documents and fees required differ between states. A DBA name isn’t trademarked, so you have free reign to choose a name that aligns with your brand.
An LLC can help legitimize your business, as you can register your LLC as a trademark to establish it as a unique business name. Check out the US Small Business Association’s website to learn more about how to register your business.
Obtain necessary licenses
Working as an independent contractor may require certain licensing depending on your location and line of work. You may need a general business license or a more specific vocational license to prove you are trained and certified to work as a massage therapist, barber, or auto mechanic, for example.
Obtain a tax registration certificate
Register with the local tax collector to get a tax registration certificate. These documents are inexpensive and, in many cities, operating without one counts as a misdemeanor.
You may hear people use the terms tax registration certificate and business license interchangeably. However, the certificate is a receipt defining how much tax you need to pay to do business in your city.
Therefore, every business, including sole proprietorships, must obtain a tax registration certificate in their city even if their clients are not in the same location.
Pay self-employment taxes
The IRS (Internal Revenue Service) classifies independent contractors as self-employed individuals required to pay self-employment tax. While full-time employees have Social Security and Medicare taxes automatically withheld from their paycheck by their employer, independent contractors must handle these payments on their own. You can calculate your estimated taxes by using Schedule SE on Form 1040.
If you earn $400 (USD) or more, you must file a tax return with the IRS. Use Schedule C (on Form 1040) to calculate and file a net income or loss for your business. Also, every time you receive a payment higher than $600 (cash or check), the client who paid must report that income to the IRS by sending a copy of Form 1099-NEC.
Every independent contractor who expects to owe $1,000 or more in taxes must make estimated quarterly tax payments for the year’s self-employed tax and income tax. Some independent contractors try to hide their earnings from the IRS to avoid paying income tax. However, it’s better to do this by the book because the penalties for not paying income and business taxes are far higher than the taxes themselves.
As you can see, being an independent contractor requires a bit more bookkeeping, which is a drawback of independent contract work compared to employment. Check out our guide on how to pay independent contractor taxes for more information.
Deduct business expenses from taxes
One perk of independent contractor work is the ability to deduct many business expenses from your annual taxes. You can claim business expenses as deductions to lower the income tax you have to pay. Your list of deductible expenses may include:
- Home office expenses
- Equipment purchases
- Business insurance
- Legal expenses
- Rent and lease payments
- Advertising costs
As an independent contractor, you may also claim deductions for health insurance premiums you paid out of pocket, including long-term care, medical, and dental insurance. If you contribute to a self-employed retirement plan, there’s also a chance to get a tax break.
Frequently asked questions about self-employment
Have more questions about what it means to be self-employed as an independent contractor? See if we answer them below.
What’s the difference between being self-employed and being a business owner?
When a person is self-employed, they earn a living from individual business activity. Therefore, self-employed people work for themselves and not for an employer. Once a self-employed person hires employees, they become a business owner.
Also, a business owner may not be involved in the day-to-day business operations, while a self-employed person owns the business and does all the work.
Do you need to be an independent contractor to be self-employed?
Being an independent contractor technically qualifies you as self-employed. According to the IRS, anyone who meets the following criteria can be considered self-employed:
- Anyone who is in business for themselves, even if it is part-time
- An individual who runs a business as a sole proprietor or independent contractor
- A member of a partnership who carries on a business or a trade
- Members of an LLC usually pay taxes as sole proprietors
Can you be an independent contractor and employee at the same time?
Not within the same company. The IRS and the US Department of Labor have drawn a clear line between independent contractors and employees. While an employee works for an employer, an independent contractor is self-employed. The types of employment contracts they sign are quite different. However, it’s possible to be an employee at one company and an independent contractor for another.
Although independent contractors engage in a specific company’s project, they don’t have the same rights as regular employees. Understand your rights as an independent contractor and be aware of employment misclassification to make sure employers treat everyone fairly.
Check that you’re classified correctly as an independent contractor
Every country classifies independent contractors differently. Even if you’re located in the same region as your client company, you should confirm you’re classified correctly. If you actually fit the criteria of an employee, your client company should consider converting you to an employee to avoid misclassification penalties.
Use our Misclassification Quiz to determine if you fit the criteria of an independent contractor or an employee.