Do You Need an Independent Contractor License to Work with Clients?

Do you need a business license to work as an independent contractor? The following article covers everything you need to know about working for yourself.

Stefana Zaric
Written by Stefana Zaric
February 1, 2022
Contents
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An independent contractor is a self-employed worker who signs contracts with one (or many) companies and controls how and when they complete the work. The client company does not control an independent contractor's work dynamics. They also don’t have to pay statutory benefits like health insurance and paid vacation days.

Today, independent contractor work is attractive because it’s flexible and can generate more income than being a full-time employee at one company. Plus, most independent contractors can work from anywhere, thanks to remote work.

Working as an independent contractor involves more specific requirements than most people think. For example, you must sign an independent contractor agreement for each project and pay self-employment tax. And depending on where you are and the kind of work you do, you may also need to acquire a business license. 

Below, we discuss whether you need an independent contractor license and walk through everything else you need to get up and running as an IC.

Do you need an independent contractor license?

We’d love to give you a yes or no answer, but the answer is that it depends on your location and industry. Even within the US, you may or may not need a business license depending on your city, state, and the kind of work businesses contract you to complete.

Let’s state with your line of work. Most industries that require business licenses for independent contracting have stringent licensing requirements in general. 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 decrease significantly. 

Next, there’s your state. Most states do not require a business license to become an independent contractor within the US. But some state laws, such as Washington’s, require all independent contractors to register business licenses. Cities within each state may have conflicting requirements, too. Your best bet is to reach out to your city’s business permits office to determine local requirements.

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 even stylists.

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?

Your local chamber of commerce won’t just tell you whether you need a business license. The chamber of commerce 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 planning and zoning department (if you’re selling physical goods or services).

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What else do you need to 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 the legal and tax implications. If you want to work as an independent contractor, we recommend taking the time to register yourself properly 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

Your main options to register as a business entity are to use your own name, register under a fictitious DBA (doing business as) name, or register as an LLC. Suppose you plan to do independent contract work longterm. In that case, we recommend registering your business as 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 is a step more legitimate. 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

As we mentioned earlier, working as an independent contractor may require 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 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 interchangeably use the terms tax registration certificate and business license. 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 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

Also, if you earn $400 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.

In addition, every independent contractor who expects to owe $1000 or more in taxes must make estimated quarterly tax payments for the year’s self-employed tax and income tax. As you can see, being an independent contractor requires a bit more bookkeeping, which is a drawback of independent contract work compared to employment.

Some independent contractors try to hide their earnings from the IRS to avoid paying the income tax. However, it is better to do this by the book because the penalties for not paying income and business taxes are far higher than the taxes themselves. 

Also, every time you receive a payment higher than 600 dollars (cash or check), a client who paid must report that income to the IRS by sending a copy of Form 1099-NEC.

Still confused by independent contractor taxes? We don’t blame you. Check out our guide on how to pay independent contractor taxes for a comprehensive run-down.

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.

What's the difference between being self-employed and 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
  • Anyone who runs a business as a sole proprietorship or independent contractor
  • A member of a partnership who carries on a business or a trade
  • Members of an LLC (a limited liability company) usually pay taxes as sole proprietors.

Can you be an independent contractor and employee at the same time?

In the same company, you can't. The IRS and the U.S. Department of Labor put 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 is 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.

The benefits of being an independent contractor outweigh the initial paperwork

Being an independent contractor involves a lot of independent administrative work. Some may prefer to be a full-time employee because the company’s HR department provides worker;s compensation insurance, handless payroll taxes, and relieves some administrative burden. 

However, being an independent contractor has many unique benefits (even if you have to understand what Schedule C means and learn how to acquire liability insurance and unemployment insurance.) 

If you haven’t yet, check out our comprehensive independent contractor guide. It covers everything you and your clients need to know about independent contractor hiring, compensation, and taxes.

Disclaimer: This post is US-focused. It's provided for informational purposes and should not be considered legal advice. Talk to a legal professional such as an employment lawyer for more info.

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